Establish legal and risk management requirements of small business BSBSMB401A

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1 2nd Edition Establish legal and risk management requirements of small business BSBSMB401A Student Workbook

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3 Student Workbook BSBSMB401A Establish legal and risk management requirements of small business 2 nd Edition 2010 Part of a suite of support materials for the BSB07 Business Services Training Package

4 Acknowledgment Innovation and Business Industry Skills Council (IBSA) would like to acknowledge HASCOM Pty Ltd for their assistance with the development of this resource. Writer: Christopher G. Kelly Industry Reviewer: Mark D Aversa, Senior Consultant Business & Hospitality WPC Group. Copyright and Trade Mark Statement 2010 Innovation and Business Industry Skills Council Ltd All rights reserved. Apart from any use permitted under the Copyright Act 1968, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, or otherwise, without written permission from the publisher, Innovation and Business Industry Skills Council Ltd ( IBSA ). Use of this work for purposes other than those indicated above, requires the prior written permission of IBSA. Requests should be addressed to Products and Services Manager, IBSA, Level 11, 176 Wellington Pde, East Melbourne VIC 3002 or Innovation and Business Skills Australia, IBSA and the IBSA logo are trade marks of IBSA. Disclaimer Care has been taken in the preparation of the material in this document, but, to the extent permitted by law, IBSA and the original developer do not warrant that any licensing or registration requirements specified in this document are either complete or up-to-date for your State or Territory or that the information contained in this document is error-free or fit for any particular purpose. To the extent permitted by law, IBSA and the original developer do not accept any liability for any damage or loss (including loss of profits, loss of revenue, indirect and consequential loss) incurred by any person as a result of relying on the information contained in this document. The information is provided on the basis that all persons accessing the information contained in this document undertake responsibility for assessing the relevance and accuracy of its content. If this information appears online, no responsibility is taken for any information or services which may appear on any linked websites, or other linked information sources, that are not controlled by IBSA. Use of versions of this document made available online or in other electronic formats is subject to the applicable terms of use. To the extent permitted by law, all implied terms are excluded from the arrangement under which this document is purchased from IBSA, and, if any term or condition that cannot lawfully be excluded is implied by law into, or deemed to apply to, that arrangement, then the liability of IBSA, and the purchaser s sole remedy, for a breach of the term or condition is limited, at IBSA s option, to any one of the following, as applicable: (a) if the breach relates to goods: (i) repairing; (ii) replacing; or (iii) paying the cost of repairing or replacing, the goods; or (b) if the breach relates to services: (i) re-supplying; or (ii) paying the cost of re-supplying, the services. Published by: Innovation and Business Industry Skills Council Ltd Level Wellington Pde East Melbourne VIC 3002 Phone: Fax: First published: September nd edition version: 2 Release date: June 2010 ISBN: Stock code: BSBSMB401A2D

5 Table of Contents Introduction... 1 Features of the training program... 1 Structure of the training program... 1 The regulatory environment and how it governs small business... 2 Compliance what it is and why it matters... 2 Assessment Tasks... 3 Recommended reading... 3 Section 1 How to Set Up a Business... 4 What skills will you need?... 4 Setting up a business... 5 Business structures... 9 Legal obligations of businesses Section summary Further reading Section checklist Section 2 How Business Complies with Laws and Regulations What skills will you need? Why business complies with laws and regulations Laws and regulation compliance: Registration, OHS, environment and planning Tax obligations of business How business enforces compliance How a business controls risk Section summary Further reading Section checklist Section 3 Contracts and How to Negotiate Them What skills will you need? Contracts and business How a business gets insurance cover How a business gets a premise Section summary Further reading Section checklist Glossary... 91

6 Appendices Appendix 1 Sample business plan Appendix 2 Sample business plan Appendix 3 Where to get forms Appendix 4 Commercial lease agreement Appendix 5 Contract of sale for a new motor vehicle Appendix 6 Answers to select learning activities

7 Student Workbook Introduction Introduction Features of the training program The key features of this program are: Student Workbook Self-paced learning activities to help you to understand key concepts and terms. The Student Workbook is broken down into three sections. Facilitator-led sessions Challenging and interesting learning activities that can be completed in the classroom or by distance learning that will help you consolidate and apply what you have learned in the Student Workbook. Assessment Tasks Summative assessments where you can apply your new skills and knowledge to solve authentic workplace tasks and problems. Innovation & Business Skills Australia has licensed the use of over 200 video vignettes from the Channel 9 television program, Your Business Success. The videos have been carefully selected and embedded into relevant learning and assessment resources in order to assist education providers and students in the learning process. Each video is accompanied by a learning activity. Videos can be found on IBSA s YouTube channel at <http://www.youtube.com/ibsachannel>. Structure of the training program This Training Program introduces you to the legal and regulatory knowledge and skills to start a business. You are not expected to have any business experience. When participating in facilitator-led learning activities, you should refer to the relevant section in this guide. Specifically, you will develop the skills and knowledge in the following topic areas: 1. How to Set up a Business Section 1 2. How Business Complies with Laws and Regulations Section 2 3. Contracts and How to Negotiate Them Section 3 You facilitator may choose to combine or split sessions. For example, in some cases, this Training Program may be delivered in three sessions, or in others, as many as six or more sessions. This training program helps you to develop your business skills and knowledge by exploring how a business can satisfy its legal and administrative obligations. Firstly, you will look at how to set up a business. The Workbook describes what to do to register a business and how to decide which business structure to choose. You will learn which legal obligations apply to a specific business structure Innovation and Business Industry Skills Council Ltd Page 1 of 130

8 Introduction Student Workbook Next, you will look at what a business can do to ensure it meets its legal obligations. The Workbook lists laws and rules your business has to satisfy. You will also examine what a business must do to satisfy its tax obligations. Later, the Workbook describes techniques your business can apply to manage the risk of harm or damage. The Workbook uses Occupational Health and Safety (OHS) as an example to demonstrate these techniques. Finally, you will look at commonly used contracts and how to negotiate them. As a preparation, you will learn how to buy insurance for your business and arrange a property to start trading in. The regulatory environment and how it governs small business Before setting up a business, an aspiring business operator has to become familiar with many rules that govern business activity, starting with government legislation. Australia, as a federated nation, has three levels of government: The Commonwealth of Australia, Australia s federal government, creates laws that apply nationwide. These describe what to do for business registration, fair trade practices, employment conditions and taxation. State and territory governments govern regions. With the exception of the Australian Capital Territory, which has limited powers, the states and the Northern Territory have laws that govern the environment, planning, antidiscrimination and consumer protection. They also control Occupational Health and Safety regulation and the issuing of licences to practise in an industry. Cities and shires as local governments control local planning. Local governments use by-laws to issue permits that control the location of business activities in particular zones. Other rules may also affect business. Before opening a business, an operator may need to demonstrate they are qualified and a member of an industry or professional association. Nearly all industries have an association with members that agree to uphold a code of practice. An individual business may decide to develop its own rules. For example, it could decide to have its own code of practice that allows an informal dress code, or only purchase stock that is not made with child labour. Compliance what it is and why it matters Compliance exists when an individual or thing satisfies the requirements of a specification, code or legislation. A business that meets its obligations is termed compliant. A business that does not meet its obligations (e.g. one that breaches or breaks a law) is non-compliant. Although the benefits of compliance are sometimes not obvious, what happens when a business is non-compliant can be dramatic. Non-compliant plumbers or builders could have their licences suspended or cancelled. Business operators who engage in misleading or deceptive advertising may face a fine or jail. The most common problem of non-compliance for a business is the possibility of having to pay extra costs or getting a bad reputation that drives customers away. Page 2 of Innovation and Business Industry Skills Council Ltd

9 Student Workbook Introduction Assessment Tasks There are two Assessment Tasks which you will complete throughout the unit. These include: research and identification of the key legislative and risk management requirements of a small business and the actions necessary to comply with these requirements a portfolio of contracts associated with the needs of a small business. These Assessment Tasks will need to relate to a business, however though this refers preferably to your own business, it may refer to a business environment or to a hypothetical business. Appendix 1 includes a sample business plan and a link to other business plans that might assist you as a basis for completing the activities and Assessment Tasks. All the Assessment Tasks need to relate to the same business. Please note: Throughout the workbook, wherever there is reference to use your business in order to complete an Assessment Task or activity you may use either an actual or hypothetical business. These Assessment Tasks will be explained to you in more detail as you undertake them and you will be provided with a marking sheet which will indicate your result from the list of competencies you have demonstrated. Recommended reading Some recommended reading for this unit includes: business.gov.au, Australian Government, viewed June 2010, <http://www.business.gov.au/> Businesses What do you want to do? Australian Tax Office, Australian Government, viewed June 2010, <http://www.ato.gov.au/businesses/> Innovation and Business Industry Skills Council Ltd Page 3 of 128

10 Section 1 How to Set Up a Business Student Workbook Section 1 How to Set Up a Business This section explores how you identify and satisfy the legal requirements needed to set up and operate a business. Scenario: Register a new business Ultra Performance Motors (UPM) You and five motor enthusiast friends have done much market research in your local city. After talking to car dealers at the last motor show, you think there is room to set up a prestige motorcar dealership in your local suburb. Although your friends can change the oil in an engine and did come up with an easy-to-remember business name Ultra Performance Motors they are not sure what to do next. You decide to do some homework. You decide to find out what has to be done to set up a business according to law. The hypothetical business, Ultra Performance Motors, will be used as case study material throughout the workbook to provide you with the information to complete many of the activities. What skills will you need? To operate a business effectively, you must be able to: communicate, create reports, keep records and consult with others apply literacy skills to interpret legal requirements, develop policies and procedures as well as analyse compliance information use research skills to investigate legal structures as well as taxation and insurance requirements. Page 4 of Innovation and Business Industry Skills Council Ltd

11 Student Workbook Section 1 How to Set Up a Business Setting up a business Whether you are starting a plumbing business, hairdressing salon, or a new multinational corporation, the steps to setting up a business are the same. Steps for setting up a business You analyse your business objectives, which includes what you want to provide. You evaluate if your business has potential, which includes finding out if there are enough clients to buy your product or service. You choose a business structure: depending on your circumstances, you could register as a sole trader, partnership or a company. After selecting a business structure and calculating its related set up costs, you then estimate the difference between future revenues and costs. This is to assess the profitability of your business. If it all looks promising, you would then register your business. Commonly this entails registering a business name with a state or territory government department. If your business is to be a company, you will have to register details with the Australian Securities and Investments Commission (ASIC). Although not compulsory, most businesses also register with the Australian Tax Office to get an Australian Business Number (ABN) Innovation and Business Industry Skills Council Ltd Page 5 of 128

12 Section 1 How to Set Up a Business Student Workbook Setting up a business: decisions I need to make The first decision you have to make is to decide whether your activity is a business or a hobby. There are administrative costs in dollars and time in maintaining a business. The costs of registering a business, preparing Business Activity Statements (BAS) and lodging annual reports take effort. You may decide having a business is not for you. Businesses do get benefits however. Compared to personal income tax, companies pay less tax. Businesses can also claim expenses as tax deductions. The risk of paying out a liability if a company goes into liquidation is also spread across many shareholders who are officially company owners. Overall, you might decide operating a business is a good idea. Despite its running costs, a business may help you keep more dollars in your pocket. Once you decide to set up a business, you then have to choose a business structure. You could register as a sole trader, partnership, company or even a trust. These structures will be explained further in the following pages. How you register depends on how much ownership and control you want to keep. It also depends on who else you want to include in your business and if you can manage and fund complex administrative procedures. This could be a difficult decision. It affects the tax you pay individually and the protection of your assets. It could also affect your ability to attract clients. For example, corporate clients may have a preferred supplier list that only includes companies. Getting advice on what is the best structure for you is a good idea as there are many elements of company and tax law to consider. Sources of advice and support For those wishing to make the leap from employee to business owner, there are many sources of advice and support. Some offer professional advice for a fee while others are free. When it comes to choosing business structures and finding out which laws and regulations you have to comply with, it pays to get legal advice. Among professional advisers, there are business advisers who specialise in business 'start ups'. Financial planners can forecast your finances given different scenarios. Besides giving tax advice, accountants and lawyers can help with the process of registration and incorporation (company registration). There are also free sources of advice. The Australian, state and territory governments all have departments catering to businesses. All have websites that offer supporting information. Many transactions can be done online (e.g. applying to register a business name), as well as on a printed form that can be downloaded. Depending which industry or trade you see your business being part of, there is an industry or trade association that can offer training as well as advice on licensing. For example, if you were setting up a business in building construction, or as an electrician or a plumber, you would look at the Housing Industry Association s at the following website: Housing Industry Association, viewed June 2010, <http://hia.com.au/>. Page 6 of Innovation and Business Industry Skills Council Ltd

13 Student Workbook Section 1 How to Set Up a Business Other advisers may be mentors you may already know. For example, you may know someone who runs a business who may also be a member of your local chamber of commerce. Although you may want to start up a newsagency and your mentor may run a tattoo and body art business, you could still benefit from their experience. This could include knowing which by-laws and regulations you have to satisfy. Your mentor might also tell you how to do it practically and cheaply. Sources of advice with contact details and website addresses Advice source Contact Accountants CPA Australia (Certified Practising Accountants) Australia, viewed June 2010, <http://www.cpaaustralia.com.au> Institute of Chartered Accountants in Australia (ICAA), viewed June 2010, <http://www.charteredaccountants.com.au> Business advisers and consultants Business Adviser directory, viewed June 2010, <http://www.businessadviser.com/directory.htm> Find Business consultants, at Yellow Pages, accessed 3/6/10, <http://www.yellowpages.com.au>. Financial planners Financial Planning Association of Australia Limited (FPA), viewed June 2010, <http://www.fpa.asn.au/findaplanner> Association of Financial Advisers, viewed June 2010, <http://www.afa.asn.au>. Government agencies business.gov.au, Australian Government, viewed June 2010, <http://www.business.gov.au> Small Business NSW, viewed June 2010, <http://www.smallbiz.nsw.gov.au> Business Victoria, viewed June 2010, <http://www.business.vic.gov.au/homepage> Queensland Government Business Development, viewed June 2010, <http://www.business.qld.gov.au> South Australia Department of Trade & Economic Development, viewed June 2010, <http://www.southaustralia.biz> Business, Government of Western Australia, viewed June 2010, <http://wa.gov.au/governmentservices/business/> Small Business Assistance, Government of Tasmania, viewed June 2010, <http://www.development.tas.gov.au/business/business_development> 2010 Innovation and Business Industry Skills Council Ltd Page 7 of 128

14 Section 1 How to Set Up a Business Student Workbook Department of Business and Employment, Northern Territory Government, viewed June 2010, <http://www.nt.gov.au/dbe/> Business and Industry Development, ACT Government, viewed June 2010, <http://www.business.act.gov.au>. Industry or trade associations business.gov.au, Australian Government, viewed June 2010, <http://www.business.gov.au> Mentors Australian Chamber of Commerce and Industry, viewed June 2010, <http://www.acci.asn.au/membersmain.htm> Solicitors Find Law Australia, viewed June 2010, <http://www.findlaw.com.au/wld/quicksearch.asp> Learning activity: The Heat Group Watch the video BSBSMB401A: The Heat Group on IBSA s YouTube channel at <http://www.youtube.com/ibsachannel>. Gillian Franklin of The Heat Group is a mentor of Kristina Karlsso, the founder of kikki K stationary. What advice does Gillian provide and why? Why was Gillian inspired by Kristina? Page 8 of Innovation and Business Industry Skills Council Ltd

15 Student Workbook Section 1 How to Set Up a Business Learning activity: Find useful websites There are a number of key websites that will have forms and documents that you will need to establish as sources of advice for your own, actual or hypothetical business. Search the internet and find some of the following websites. Commonwealth Government business Australian Tax Office Commonwealth of Australia Law state and territory government websites for business (there are many) industry or trade associations. Business structures Before registering a business, prospective business owners have to decide which business structure to choose. What separates the different structures is how they are owned and managed. Small businesses register mostly as a: sole trader where an individual owns and operates a business partnership where a group of people own and operate a business together but not as a company company where office holders of a legal entity run the business but it is owned separately by shareholders trust where an entity holds property or income for the benefit of its members. Comparing business structures The goals and circumstances of prospective business proprietors decide which business structure to adopt. A proprietor will need to make decisions about what type of business they want to build, what income they expect and how tax will impact their business and personal income. The proprietor needs to decide who owns the business and how rights and obligations are shared. They need to consider how much responsibility to pay debts (personal liability) they are willing to assume should their business fail. This relates to how risky the activities of the business are. A proprietor must also decide which assets would be protected from liquidators should winding up their business be necessary. Other factors to consider include whether there will be an increase in the value of business assets. This means choosing a structure that minimises the amount of capital gains tax that has to be paid. Finally, whether the proprietor wants to use their own name for a business or a trading name will also decide their choice of business structure. The choice can be complicated, which is why seeking professional advice is useful Innovation and Business Industry Skills Council Ltd Page 9 of 128

16 Section 1 How to Set Up a Business Student Workbook Business structures and their features Business structure Features Sole trader simple and cheap to set up one individual trades on their own may operate under their own name or a registered business name controls and manages the business is responsible for all debts and liabilities. Company complex and most expensive to register has tax benefits (lower tax rates) can do business in its own right as an independent entity shareholders own the company directors run the company shareholders exposed to limited liability to pay debts directors and employees can be shareholders registered with ASIC must submit reports to ASIC. Partnership formed when two or up to 20 people go into business together created using a partnership agreement Trust run by a trustee partners may operate under their own names or a registered business name. trustee holds all property and earnings pays distributions to members commonly used by large property organisations. Sole traders A sole trader, also called a single proprietor, is the simplest form of business. One person owns all of the assets and is responsible for all debts. Many businesses such cafes, personal trainers and hair stylists operate as sole traders. Partnerships A partnership is an association of two or up to 20 persons who come together to operate a business for profit. In standard partnerships, partners have to invest an equal amount of time, effort and skill in their business. Limited partnerships include passive investors who do not operate the business. Page 10 of Innovation and Business Industry Skills Council Ltd

17 Student Workbook Section 1 How to Set Up a Business Each partner has an unlimited personal liability to the partnership s creditors. This means all partners are liable for wrongful acts and breaches of trust by any partner. They are responsible for paying outstanding debts if other partners do not pay. Companies A company (also commonly referred to as corporation) is the most complex business structure. Business proprietors registering a company must register with the Australian Securities and Investments Commission (ASIC). Companies must also satisfy obligations set out in Corporations Act. A company is a legal entity that has rights and liabilities separate from its shareholders. Notably, ownership is separate from control. Shareholders of a company are liable to pay debts of a company should it liquidate but only in line with the number of shares they buy. Companies that limit exposure to the risk of paying debts in this way are known as proprietary limited (Pty Ltd) companies. Shareholders receive earnings paid as dividends for each share they own. A company must have a board of directors who are elected by shareholders at an annual general meeting. The board sets policy and appoints officers to manage the company on a day-to-day basis. Shareholders do not participate directly in management decisions unless they are also directors or officers. Unlike a sole trader or partnership that dissolves at the death of its proprietors, a company can have an unlimited life. Trusts A trust has a trustee who holds and manages all property and earnings on behalf of beneficiaries who are trust members. A trustee pays earnings to members as distributions. Small businesses rarely use this structure. Larger property development businesses often register as property trusts. Learning activity: Choose the best business structure for UPM You and a friend William Billy McLaren, a former racing driver, think the economy is about to improve. Billy says now is a great time to begin a prestige motorcar dealership, which he wants to call Ultra Performance Motors. Both you and Billy do not have enough cash to buy the Bugatti Veyron or Aston Martin convertibles you want to sell. However, you are a member of a sports car club and know 20 others who would contribute investment finance, but do not have the time to run a business. Billy s accountant mate Basil Weasley says being by yourselves, you would have problems getting a loan from a bank. He also worries about what would happen if either you or Billy could not work. On the positive side, Basil says there are tax advantages to be gained if UMP was created with the right business structure. With other potential board members (in a group with other learners) you have to make a decision. What business structure should UPM be sole trader, partnership or company? 2010 Innovation and Business Industry Skills Council Ltd Page 11 of 128

18 Section 1 How to Set Up a Business Student Workbook Why? Registering a business Once you have gathered your information and decided you are ready to create a business, the next step is to register the business. For most businesses, you register a: business name Australian Business Number (ABN) Tax File Number (TFN) company (if you have chosen this business structure). Registering a business name A business proprietor or owner has to register a business name with a state or territory authority. First, they get an application to register a business name from one of these authorities: State Australian Capital Territory New South Wales Northern Territory Queensland South Australia Tasmania Victoria Western Australia Office ACT Office of Regulatory Services NSW Office of Fair Trading Department of Justice Queensland Office of Fair Trading Office of Consumer and Business Affairs Consumer Affairs and Fair Trading Consumer Affairs Victoria Department of Commerce Most states have application forms that you can download, while some allow you to register details on a website. Page 12 of Innovation and Business Industry Skills Council Ltd

19 Student Workbook Section 1 How to Set Up a Business Learn more: Register your business Go to business.gov.au, Australian Government, viewed June 2010, <http://www.business.gov.au>. Select: Business Topics > Registration & licences > Register your business or company > Register your business name in your state or territory. After a proprietor submits an application, a government official checks the name to ensure another company does not already use it as a trademark. To do this, officials check try to find the name in the Intellectual Property (IP) Australia database found at the following link. Intellectual Property (IP) Australia, viewed June 2010, <http://www.ipaustralia.gov.au/>. The official also confirms the proprietor and business details are correct. Once the application is approved, the proprietor receives a registration certificate. Usually this certificate is valid for three years before it has to be renewed. Another way to confirm if your business is registered is to find it on the ASIC National Names Index at the following link. ASIC National Names Index, viewed June 2010, <http://www.search.asic.gov.au/gns001.html>. Registering an Australian Business Number (ABN) An Australian Business Number (ABN) is a unique identifier of a business. Although having an ABN is not compulsory, it has advantages: you can claim goods and services tax (GST) credits you can claim fuel tax credits when trading with other businesses, if you do not have an ABN you may receive smaller payments. This is because they may hold amounts due to your business as pay as you go (PAYG) withholding for tax purposes. an ABN on purchase orders and invoices verifies who you are, giving your business more credibility. Learn more: Register an ABN To register for an ABN, you can apply online at the Australian Business Register: Australian Business Register, Australian Government, viewed June 2010, <http://www.abr.gov.au/> Select: Home> Businesses > What do you want to do?> Apply for an ABN, TFN or other registration> ABN, TGN, GST, PAYG withholding> ABN essentials> Basic topics > Registration 2010 Innovation and Business Industry Skills Council Ltd Page 13 of 128

20 Section 1 How to Set Up a Business Student Workbook You can also request a printed form from the Australian Tax Office. Australian Tax Office, viewed June 2010, <http://www.ato.gov.au>. The ATO posts a printed confirmation within 28 days of registration. Registering a Tax File Number (TFN) The Australian Tax Office issues a Tax File Number (TFN) to identify an individual or organisation mainly for the purposes of tax collection. Partnerships, companies and trusts must have their own TFN. Those applying for an ABN can apply for a TFN at same time using the same form. All businesses should have a TFN when: reporting to investment institutions responsible for paying interest, share dividends or unit trust distributions communicating with government departments such as the ATO when applying for an ABN, or lodging business activity statements and income tax returns. Learn more: Tax file number To register for a TFN, you can apply online at the following link. Australian Business Register, Australian Government, viewed June 2010, <http://www.abr.gov.au>. You can also request a printed application directly from the ATO. Registering a company If you spoke to your advisers and researched which business structure is best for your purposes, you might register as a company. This is called incorporation. You register a company with the Australian Securities and Investments Commission (ASIC). ASIC is a part of the Australian Government that administers the Corporations Act. As a company, you have exclusive rights to a company name throughout Australia without having to register the same name in each state. Before registering, you have to confirm your chosen company name is unique. The simplest way to confirm this is to visit the ASIC website: ASIC, viewed June 2010, <http://www.asic.gov.au>. In the Company and business names search box, enter your company name. If the search locates a company, you will need a different name. Note: ASIC does prohibit the use of some words, but it is rare that this issue arises. When it comes to registering the company, you have to fill out Form 201 Application for registration as an Australian company. You will have to name officeholders (directors), an ABN, state whether it is a public or proprietary (private) company and how shares will be owned. Because the process is complex, accountants are often used to help fill out and submit the registration form. Page 14 of Innovation and Business Industry Skills Council Ltd

21 Student Workbook Section 1 How to Set Up a Business Once ASIC registers your company, you will receive an ASIC Certificate of Company Registration. You will also receive an Australian Company Number (ACN). This can be searched for on the ASIC National Names Index website: National Names Index, ASIC, viewed June 2010, <http://www.search.asic.gov.au/gns001.html>. Learning activity: Complete registration forms Complete forms to register a: business name Australian Business Number Tax File Number company. Legal obligations of businesses A business has to satisfy many rules and regulations. The Australian Government (Commonwealth of Australia) as well as state and territory parliaments pass acts that become legislation. Local governments authorise by-laws that govern the issuing of planning permits to locate activities in authorised zones. Depending which industry or trade you want your business to belong to, there are also licensing and membership requirements you need to satisfy. For example, to sell alcohol you need a Liquor Licence. To run a car dealership you would need an LMCT Licensed Motor Car Trader licence. Industry and trade organisations set standards to get licences, although it is state and territory government departments that actually issue these licences. Industry and trade organisations often require that their members maintain a code of practice. This lists standards such as the need to keep your skills and knowledge current, as well as good business behaviour. For example, Master Builders Australia, the industry association that represents building and construction businesses, has a National Code of Practice. The MBA demands its members to uphold business ethics, use best practice, and be accountable for their work. The code also sets out methods that members should use to resolve disputes. Many businesses have their own code of practice. Although strictly not a legal obligation, it sets out rules governing behaviour. For example, some cafes only serve fair trade coffee, and many fashion stores will not sell fur products. Although the list of laws and regulations can be long, the following table summarises those most likely to affect your business. Note: Some laws apply only to companies Innovation and Business Industry Skills Council Ltd Page 15 of 128

22 Section 1 How to Set Up a Business Student Workbook Regulation that governs business Jurisdiction Law or regulation Comment Commonwealth Commonwealth State or territory Corporations Act Trade Practices Act Fair Work Act Goods and Services Tax Act Fringe Benefits Tax Act Income Assessment Tax Act Various licences, for example: Motor Car Traders Act (VIC) Second-Hand Dealers and Pawnbrokers Act (ACT). Consumer protection and fair trading laws For example, Fair Trading Act(WA) Occupational Health and Safety Act Anti-discrimination Act Equal Opportunity Employment Acts (States and Commonwealth) Specifies: company registration director obligations mandatory reporting Competitive trading practices Employment conditions GST Fringe Benefit Tax Income Tax Governs an industry s: licence and registration requirements offences for breaches. Governs: fair treatment of customers disclosure requirements. Requirements to protect the health, safety and welfare of people at work. Fair and equitable access for all to employment conditions, training and promotional opportunities. Page 16 of Innovation and Business Industry Skills Council Ltd

23 Student Workbook Section 1 How to Set Up a Business Jurisdiction Law or regulation Comment Local government Industry or Professional Association Enterprise Planning and Environment Acts: Environmental Planning and Assessment Act(NSW) Planning and Environment Act (VIC) Payroll Tax Act Planning permits to: extend a business premises sell or serve alcohol consumed on a premises install a sign or advertisement place items on a footpath register a food or health business register a health-related business such as a hairdresser, beauty therapist or body artist provide food at temporary events. Code of Practice or Code of Ethics for: Motor Trade Association of NSW Fitness Tasmania Code of Practice for Fitness Facilities Australian Retailers Association Code of Practice. Code of Practice or Code of Conduct: how to treat customers affirmative action family-friendly work practices use of plastic bags ethical trading. Lists environmental controls to regulate land use, development and subdivision. Tax on a wage bill Specific to each local government Specific to each association Workplace practices 2010 Innovation and Business Industry Skills Council Ltd Page 17 of 128

24 Section 1 How to Set Up a Business Student Workbook Business registration business names In starting up a business, your first obligation is to satisfy the requirements of the Business Names Act in your state or territory. The authorising state or territory authority will not register a business name if it: could be mistaken for a business name that is already registered in the same state is registered or reserved for special usage by the Corporations Act (and ASIC) is the name of an incorporated association, building society, cooperative company or cooperative in the same state misleads with respect to the nature, objectives and purposes of the business is likely to offend members of the public contains the following reserved words and phrases or their abbreviations or other words or phrases or abbreviations that have their meaning: o o o o o o o o o building society chamber of commerce chamber of manufactures chartered College of Advanced Education consumer cooperative credit union executor o o o o o o o o o o friendly society guarantee Institute of Advanced Education Made in Australia Oxfam savings stock exchange trust trustee university. suggests a connection with the Crown, the Government of the Commonwealth of Australia or of a state or territory includes the terms Commonwealth or Federal suggests a connection with the government of a foreign country suggests a connection with a federal, state or local government department, or authority suggests a connection with ex-military service organisations when the connection suggested does not exist. After you submit the business name application and pay a registration fee, the authority approves the registration. When the registration period expires, you will have to renew it. Normally the renewal of the registration is required every three years. Page 18 of Innovation and Business Industry Skills Council Ltd

25 Student Workbook Section 1 How to Set Up a Business Example: Business Name Registration What not to do For many businesses, their name is their trademark and they defend it aggressively. For example, Coca Cola, McDonalds and Ferrari are brands as much as business names. Business Names Acts throughout Australia demand a name of one business must not be mistaken for the identity of another. This could mean you have to spend some time thinking what business name you choose. Not all countries show as much care to avoid this confusion, however. Below are examples, with their legal equivalents, you might find on product labels at some discount shops: Converse Converse Daiads Adidas Dole And Gabbana Dolce & Gabbana HiPhone iphone Kelvin Klein Calvin Klein Mac Duck McDonald's Naik Nike Nokla Nokia Panasenic Panasonic Paradi Prada Pmua Puma Polystation Playstation Sonia Sony Under Australian law, these names would never be registered! 2010 Innovation and Business Industry Skills Council Ltd Page 19 of 128

26 Section 1 How to Set Up a Business Business registration Company obligations If you register as a company with ASIC, you have to satisfy requirements set out in the Corporations Act. As these are complex, an accountant can provide much help in satisfying these requirements, especially if you as a proprietor are also a director. This includes ensuring directors: are always honest and careful in all dealings know what the company does take extra care if handling other people s money can pay the company s debts on time ensure the company keeps proper financial records act in the company s best interests, despite not owning it, even though they may have set up the company (for personal or taxation reasons) use information they get through their position properly and in the best interests of the company; avoid using information to gain a personal advantage if they use it the wrong way or dishonestly. Business registration company record keeping Of the records your company has to maintain, you need to keep: cash records (for example, bank statements, deposit books, cheque butts or petty cash records) creditor and purchases records (for example, purchase orders, invoices and statements received, paid and unpaid invoices; a list of all purchases, and a list of all creditors with their balances) debtor and sales records (for example, a list of debtors and their balances, delivery dockets, invoices and statements issued and a list of all sales transactions) deeds, contracts and agreements a general ledger for recording all the company s transactions and balances (for example, revenue, expenses, assets and liabilities) and summarising transactions and balances listed in other records inventory records investment records (for example, contract notes, dividend or interest notices, certificates) a register of property, plant and equipment showing transactions and balances in relation to individual items tax returns and calculations (for example, income tax, group tax, fringe benefits tax, GST returns and statements) wage and superannuation records. Page 20 of Innovation and Business Industry Skills Council Ltd

27 Student Workbook Section 1 How to Set Up a Business Your company would also have to prepare monthly statements that includes a: Statement of Financial Performance showing your company s revenue and expenses and the profit or loss Statement of Financial Position a statement showing what your company owns and the debts it has to pay Statement of Cash Flows a summary of cash in and outflows. Each year your company would have to submit an annual statement (or report) and pay a registration fee to ASIC. You would report your company s details including: the names and addresses of its directors, company secretary, the address of the registered office, principal place of business and any ultimate holding company (if it exists) its members and their share details paying an annual registration fee to ASIC. All businesses have to pay federal taxes, which includes income tax, capital gains tax, fringe benefits tax as well as goods and services taxes (GST). In addition, businesses are responsible for holding back some of the income paid to employees. Businesses pay this to the ATO as income tax payments for their employees. Although not a tax, your business has to pay a percentage of your employees earnings into a recognised superannuation scheme. There are also state payroll taxes and stamp duties that businesses must pay. Occupational Health and Safety (OHS) To satisfy the Occupational Health and Safety Act of your state or territory, your business must ensure the health, safety and welfare of employees at work by: keeping workplaces safe ensuring entrances and exits are safe ensuring the safe use, handling, storage and transport of plants and substances providing and maintaining safe systems of work providing working environments with no risks to health providing information, instruction, training and supervision to preserve the health and safety of employees providing facilities that support the welfare of employees. The Student Workbook explores OHS obligations in detail in Section 2 How Business Complies with Laws and Regulations Innovation and Business Industry Skills Council Ltd Page 21 of 128

28 Section 1 How to Set Up a Business Environmental and planning laws and regulations Unlike other areas of legislation with a strict separation of federal, state and local government responsibility, environmental laws and regulations can overlap. For building and construction businesses, they will have obligations specified in their state or territory s Planning and Environment Act. This lists planning controls aimed at preserving the environment when land is developed or subdivided. It may assert that before a state or territory authority approves a development, there must be an environmental assessment. Planning and environment acts also describe different applications businesses must submit to get permission to start their projects. These acts also explain how authorities approve applications and what to do if an application is rejected. Local governments also have planning by-laws and issue permits to limit business activity in specific zoned areas. Businesses would need to contact their local city or shire to confirm what these are. Example: Legal obligations what happens when you ignore them In 2004 GlaxoSmithKline marketed its Ribena drink to consumers who saw it as a nutritious alternative to other drinks. Mothers with young children were keen buyers of the drink for this reason. The company s claim, the blackcurrants in Ribena contain four times the Vitamin C of oranges, reinforced this perception. In 2007, two New Zealand schoolgirls, Anna Devathasan and Jenny Suo, conducted a science experiment to measure the Vitamin C content of their favourite drinks. When they tested Ribena, they found there was less Vitamin C than what was advertised.they then discussed their findings with GlaxoSmithKline. Later, the New Zealand Commerce Commission took action against GlaxoSmithKline suggesting it breached the Fair Trading Act by making false and misleading advertising. Unlike the two schoolgirls, its response was far more aggressive. The commission challenged the claim Ribena contained blackcurrants. The company admitted the blackcurrant content of the drink was small and highly processed. As sugar and water were the main ingredient, the claim probably misled consumers. In an Auckland court, GlaxoSmithKline eventually pleaded guilty to 15 charges of making misleading claims about how much Vitamin C was in its product. GlaxoSmithKline was then fined NZ$227,500 ($200,000). Unlike New Zealand, the company has faced no similar prosecution or fine in Australia. Source: K. Burke, 2007, Sweet victory for students as Ribena claim draws fine, The Sydney Morning Herald, March 28, Page 22 of Innovation and Business Industry Skills Council Ltd

29 Student Workbook Section 1 How to Set Up a Business Learning activity: Relate a business to the legislation and regulations that govern it Record the legislation and regulations that you think would govern the different types of businesses listed below. In order to successfully complete this task you will need to refer to previous pages of this section, including the table Regulation that governs business. 1. Food Act (S,T) 2. Health Act (S, T) 3. Licences (S,T) 4. Certification (industry) 5. Payroll Tax (S,T) 6. OHS (S,T) 7. Environment, planning, zoning (local government) 8. Corporations Act: Company registration (C) (S, T) = State or Territory legislation/regulation (C) = Commonwealth legislation/regulation Businesses Laws and Regulations a. Café Squisito, Antonio Visconti Owner-operator b. World Property Construction Pty Ltd, Huw Mungus Director c. Ultra Performance Motors Pty Ltd, William McLaren Director d. Erinsborough Hairdressing & Body Art, Sharon Ng and Kylie Azzopardi Owners e. Personal Trainer, Brett Pitt 2010 Innovation and Business Industry Skills Council Ltd Page 23 of 128

30 Section 1 How to Set Up a Business Section summary You should now understand how to identify and implement the legal requirements needed to set up and operate a business. In practice, you need to: identify laws and regulations that apply know what legal requirements you must satisfy. Further reading Australian Taxation Office Businesses, Australian Government, viewed June 2010, <http://www.ato.gov.au/businesses> Registration & licences, business.gov.au, Australian Government, viewed June 2010, <http://www.business.gov.au/businesstopics/ Registrationandlicences/Pages/default.aspx> ABN registration for companies, partnerships, trusts and other organisations, Australian Taxation Office, viewed June 2010, <http://www.ato.gov.au/businesses/content.asp?doc=/content/15773.h tm&pc=001/003/021/001/004&mnu=610&mfp=001/003&st=&cy=1> Tax file number application for companies, partnerships, trusts and other organisations, Australian Taxation Office, viewed June 2010, <http://www.ato.gov.au/content/downloads/nat3799e.pdf> Application for registration as an Australian company, Australian Securities and Investments Commission, Australian Government, viewed June 2010, <http://www.asic.gov.au/asic/pdflib.nsf/lookupbyfilename/ 201.pdf/$file/201.pdf> Business Licence Information Service, viewed June 2010, <http://www.bli.net.au/>. Your company and the law, Australian Securities and Investments Commission, Australian Government, viewed June 2010, <http://www.asic.gov.au/asic/asic.nsf/byheadline/your%20company% 20and%20the%20law>. Section checklist Before you proceed to the next section, make sure you are able to: describe the process of setting up a business compare business structures identify legal obligations of a business. Page 24 of Innovation and Business Industry Skills Council Ltd

31 Student Workbook Section 2 How Business Complies with Laws and Regulations Section 2 How Business Complies with Laws and Regulations This section examines techniques you can use to make sure your business satisfies the requirements of legislation, codes and regulations. Scenario: Compliance program needed Due to the early retirement of the managing director you have now become the managing director of Ultra Performance Motors Pty Ltd. Being a responsible business manager, you want to know how UPM is performing. You keep an eye on UPM s accounts to confirm its cash flow is in profit. It is easy to do because you use accounting software. What makes you nervous is that you want to be certain that neither the business nor yourself will be prosecuted for some unforeseen legal action. As you naturally want to avoid fines, costs, suspensions and jail, you make an executive decision. You call the staff together. As a director, you stand to your feet and ask: Does anyone know anything about compliance? What skills will you need? In order to work effectively when ensuring a business complies with laws and regulations, you must be able to: communicate, create reports, keep records and consult with others apply literacy skills to interpret legal requirements, develop policies and procedures as well as analyse compliance information use research skills to investigate legal structures as well as taxation and insurance requirements employ time management skills to prioritise tasks and to meet key dates Innovation and Business Industry Skills Council Ltd Page 25 of 128

32 Section 2 How Business Complies with Laws and Regulations Why business complies with laws and regulations Section 1 showed there are many laws and regulations a business has to satisfy. This adds up to a lot of regulation and expense for a business. Regulations aim to make sure a business uses culturally appropriate practises and trades in a way that respects the rights of consumers. Cultural considerations refer broadly to issues generally pertaining to sex, gender, age and ethnicity. A business that employs people from a culturally and linguistically diverse background (CALD) needs to ensure that the communication of OHS procedures and guidelines are understood by all their staff in order for the business to comply with OHS legislation. For example, Food safety program templates for food service and retail businesses on the Food Safety website have been written in several different languages to ensure that all businesses understand and comply with the Food Safety Program provided by the State Government. Cultural considerations may also be extended to encompass a range of other groups of people, under-age drinkers or compulsive gamblers. For example, compulsive gamblers can elect to self-exclude. Under Responsible Gaming Legislation the hotel or gambling venue will be required to close the customer s account for a set period. If the hotel still continues to take bets from the client then a compensation claim might be made against them. A business needs to meet its registration obligations and operate with a duty of care to avoid negligence. A business that fails to comply with legislation can face punishment that could come in many forms. For example, a business placing job advertisements with a gender or a racial requirement could find itself fined by government authorities under an antidiscrimination act. Company directors could face a fine if they fail to provide key information about their company s finances to administrators, or do not update ASIC s public register with current company information. ASIC can also deregister a company if it does not pay its registration fee, submit an annual report, or lodge a compliance report if a company is requested to do so. Businesses can suffer prosecution if they treat consumers poorly. If a business does not present accurate and truthful information about a product or service to a consumer, it could face prosecution from the Australian Competition and Consumer Commission (ACCC) under the Trades Practices Act. Deceptive and misleading advertising is also grounds for prosecution. Bait advertising that promises a low price on stock that is held in insufficient numbers to meet customer expectations is also illegal. Unconscionable Conduct breaks the conditions (or breaches) this act and can attract fines. The ACCC considers businesses unconscionable when they do not make key terms in a contract of sale understandable. This applies also if they exploit low-income consumers by making false statements about the true cost of a cheap loan. Likewise, business proprietors can face a fine if they do not explain conditions in a contract to a consumer they know does not speak English or has a learning disability. Page 26 of Innovation and Business Industry Skills Council Ltd

33 Student Workbook Section 2 How Business Complies with Laws and Regulations Business proprietors may face compensation claims if they or their staff fail to show a duty of care to others who, in turn, suffer injury because of actions the business takes. In this situation, a business demonstrates negligence if it does not take steps to prevent injury. Legal practitioners call laws dealing with the redress of injury in this context as the Law of Torts. Tort law and the duty of care concept are intrinsically linked through the law of negligence; tort law provides remedies for civil wrongs that occur outside any contractual arrangement. Negligence has been defined as the failure to apply ordinary care to a situation or transaction through either an act or omission and the law of negligence affects the way in which an organisation structures, produces or delivers its services or products to clients. This translates into what is known as the duty of care requirement for an organisation. The duty of care concept, as it applies to an organisation, sets standards for the services and goods and the way services are delivered and the goods produced. Tort Law as it relates to the duty of care requires only that people within an organisation act reasonably and within the standards they have adopted for their organisation. Where an organisation, or a member of that organisation, does not act reasonably and within standards, and injury to another person is caused, the injured party can seek redress using Tort Law. Injury in this case does not necessarily mean a physical injury. It can also mean things such as financial loss, loss of productivity and damage to property or reputation. Other consequences of non-compliance may include fines from cities or shires for violations of by-laws. A professional or trade association can expel a member if they ignore the association s code of practice. In some cases, this could mean a business could not trade and earn revenue. Another reason why a business should comply with the law relates to maintaining good will. Notably, a business known not to use industry best practices and standards will see its revenues shrink as they lose clients to competitors. Costs and benefits of compliance Besides avoiding prosecution, making sure a business meets conditions set out in a law, regulation, code or standard creates benefits that can help a business. There are costs of compliance that can shrink profits, but there are benefits and gains. As a business operates sustainably to become a going concern, the benefits of compliance eventually fund the set up costs. The following table examines the most common costs and benefits of a compliance program Innovation and Business Industry Skills Council Ltd Page 27 of 128

34 Section 2 How Business Complies with Laws and Regulations LEGISLATION AND REGULATION COMPLIANCE Costs More administration: checking and filing compliance reports. Benefits Avoid fines, prosecution (legal costs) and jail for non-compliance Bigger training budget needed: for OHS, EEO work practices, courses and manuals. Customers perceive meeting standards as quality and pay more for it. LEGISLATION AND REGULATION COMPLIANCE Costs Greater capital expenses: such as fire sprinklers, air conditioning and accessibility ramps. Benefits Avoid injury and death: you avoid negligence claims and pay lower WorkCover premiums. Checking results in lengthened tasks: inspections of plant, equipment and processes take time. Less down time reduces interruptions to business down time - when your business cannot trade or earn Reduce the risk property damage: from fires or burglary As businesses have to obey the law, you could argue many costs of compliance are unavoidable (also known as sunk costs ). For example, when a company submits an annual report to ASIC, it has to purchase the services of an accountant to audit their report. To show a commitment to equal employment opportunity (EEO), a business may have to fund disabled toilets and ramps. Even the act of having staff check and write up compliance reports is costly in terms of labour and administration. For example, it takes time and effort when a health and safety officer records whether cleaners disinfect toilets periodically. Making sure a business is compliant does deliver advantages however. In time, these offset the costs of compliance. These include avoiding the need to pay Page 28 of Innovation and Business Industry Skills Council Ltd

35 Student Workbook Section 2 How Business Complies with Laws and Regulations fines, the costs of going to court and potentially prosecution that could lead to paying compensation or jail. Publicising that your business satisfies industry standards can attract customers who seek quality. Complying with OHS legislation makes a workplace safer. This reduces the possibility of injury and death, avoids negligence claims and leads to lower WorkCover insurance premiums. Reporting whether equipment or processes meet standards helps identify faults early that staff can then fix. In this way, compliance checking reduces business interruptions down time when your business cannot trade and earn. Other compliance checking prevents costs. For example, testing if your fire and burglar alarms work helps prevent the cost of property damage and theft. Learning activity: List costs and benefits of compliance for UPM For Ultra Performance Motors, list the costs and benefits of compliance. Ultra Performance Motors Legislation and regulation compliance Costs Benefits 2010 Innovation and Business Industry Skills Council Ltd Page 29 of 128

36 Section 2 How Business Complies with Laws and Regulations Laws and regulation compliance: Registration, OHS, environment and planning Previously, the Student Workbook identified many laws and regulations your business has to abide by. Next, you will find out how to do so. Given compliance means satisfying conditions, also called provisions, to start with, you need to find out what these are. When starting up your business, you have to identify the requirements of business registration and those governing where you intend to trade. These include Environment and Planning applications and Occupational Health and Safety. The table on the following page lists legislation that specifies these requirements. Laws and regulations with administering authorities Activity Law or regulation Authority Registration (Business Name) Registration (ABN, TFN) Business Names Act 2002 (NSW) Business Names Act 1962 (VIC) Business Names Act 1962 (QLD) Business Names Act 1996 (SA) Business Names Act 1962 (WA) Business Names Act 1962 (TAS) Business Names Act 2002 (NT) Business Names Regulation 2004 (NT) Business Names Act 1963 (ACT) A New Tax System (Australia Business Number) Act 1999 Income Tax Assessment Act 1936 NSW Office of Fair Trading Consumer Affairs Victoria Queensland Office of Fair Trading Office of Consumer and Business Affairs South Australia Department of Commerce Western Australia Consumer Affairs and Fair Trading Tasmania Department of Justice Northern Territory ACT Office of Regulatory Services Australian Tax Office (ATO) Page 30 of Innovation and Business Industry Skills Council Ltd

37 Student Workbook Section 2 How Business Complies with Laws and Regulations Activity Law or regulation Authority Registration (Company) Occupational Health and Safety (main legislation) Occupational Health and Safety (state and territory legislation) Environment and planning Corporations Act 2001 Occupational Health and Safety Act 2000 (NSW) Occupational Health and Safety Act 2004 (VIC) Workplace Health and Safety Act 1995 (QLD) Occupational Health, Safety and Welfare Act 1986 (SA) Occupational Health, Safety and Welfare Regulations 1995 (SA) Occupational Safety and Health Act 1984 (WA) Workplace Health and Safety Act 1995 (TAS) Workplace Health and Safety Act 2007 (NT) Occupational Health and Safety Regulation 1991 (ACT) Occupational Health and Safety Act 1989 (ACT) Environmental Planning and Assessment Act 1979 (NSW) Planning and Environment Act 1987 (VIC) Integrated Planning Act 1997 (QLD) South Australian Planning Act 1982 (SA) Planning and Development Act 2005 Australian Securities and Investments Commission (ASIC) WorkCover New South Wales Work Safe Victoria Workplace Health and Safety Queensland SafeWork SA WorkSafe Western Australia WorkCover Tasmania NT WorkSafe ACT WorkCover NSW Department of Planning Department of Planning and Community Development Victoria Environmental Protection Agency Queensland Department of Planning and Local Government South Australia WA Planning Commission 2010 Innovation and Business Industry Skills Council Ltd Page 31 of 128

38 Section 2 How Business Complies with Laws and Regulations Activity Law or regulation Authority Land Use Planning and Approvals Act 1993 (TAS) Northern Territory of Australia Planning Act 1999 (NT) Land (Planning and Environment) Act 1991 (ACT) Resource Planning and Development Commission TAS Northern Territory Department of Planning and Infrastructure ACT Planning and Land Authority Registration obligations In Section 1 How to Set Up a Business, you found out how to register a business. Once your business is registered, there are still ongoing obligations you have to meet. These include: renewing your business name and paying a registration fee once a registration has expired, normally after three years office holders being honest, careful and acting in their company s best interest in all their dealings; also with records that show this and demonstrate due diligence producing reports that show your business pays its debts keeping financial records sending monthly statements to ASIC if you register as a company that include a: o Statement of Financial Performance o Statement of Financial Position o Statement of Cash Flows. submitting an annual statement (or report) to ASIC paying an annual registration fee to ASIC. Page 32 of Innovation and Business Industry Skills Council Ltd

39 Student Workbook Section 2 How Business Complies with Laws and Regulations OHS obligations According to Occupational Health and Safety legislation, a business has to protect and promote the health and safety of people at a workplace. All states and territories have Occupational Health and Safety Acts and regulations. Besides OHS Acts, other legislation also exists that governs safety in a specific industry or trade. For example: NSW businesses installing gas appliances are subject to a Dangerous Goods (Gas Installations) Regulation To work with potentially dangerous chemicals, a business has to have a licence under the Environmentally Hazardous Chemicals Act Café proprietors are subject to the Food Act that sets out how food should be prepared and handled. Each state and territory has similar laws you need to identify. Contacting your local OHS authority helps to do this see previous table. OHS acts oblige you to take precautions and consult. These require you as an employer to make sure: premises where employees work are safe and without risks to health (this includes access to or exit from premises you control) any plant or substances you give to employees at work are safe and without risks to their health when used properly work processes and the work environment are safe and without risks to the health of employees you provide necessary information, instruction, training and supervision to maintain employees health and safety at work adequate facilities exist for the welfare of employees at work. Besides complying with OHS legislation, your business needs to prove that it does. Potentially at the request of a safety inspector or a court of law, you might have to demonstrate you have records that show how you enforce compliance. Legal practitioners call this demonstrating due diligence. The Workbook will look at how to do this later, in the topic entitled How business enforces compliance. Environmental and planning obligations Although state and territory legislation sets out rules businesses have to comply with, local councils administer environment and planning regulation. Each council has a planning officer who administers rules governing land use. If your business needs to use or develop of land, you will need a planning permit. To get this, you need to submit an application. For example, you would need planning permits to construct a building or carry out works such as painting a shop. You would also need a permit to sub-divide a warehouse into shops or apartments or install signs that were visible from a street. You get an application for a planning permit from your state or territory planning authority or local council if you live in a rural area. Later, you would send this application to the planning office of your local council Innovation and Business Industry Skills Council Ltd Page 33 of 128

40 Section 2 How Business Complies with Laws and Regulations To make sure you comply with all legal environmental and planning obligations when you fill in the application, you would: decide which permit you need by talking to your council s planning officer identify planning schemes (whether local or state) that apply; get a planning certificate from your state or territory planning authority to list these zoning requirements check if your council has a planning checklist that sets out other requirements; for example, you might need to attach an environmental impact statement with your application state your land s official address; get a land or property title from your state or territory registry office to confirm this explain your proposed land use or development provide an estimate of your project s cost to calculate an application fee include an application fee list how land is used now, for example, its current activities and buildings identify encumbrances on your land or property title; these are conditions that restrict land use that include: o restrictive covenants restrictions on the ownership of land for the benefit of others o easements rights to others such as access or the provision of a service such as water rights o building envelopes the development boundaries of land lodge the application for permit with your local council s planning office. Page 34 of Innovation and Business Industry Skills Council Ltd

41 Student Workbook Section 2 How Business Complies with Laws and Regulations Learning activity: List laws and regulations for UPM For Ultra Performance Motors, list laws, regulations and codes of practice the business has to comply with. Ultra Performance Motors Legislation and regulation compliance Jurisdiction Law or regulation Commonwealth State or Territory Local government Industry or Professional Association Enterprise 2010 Innovation and Business Industry Skills Council Ltd Page 35 of 128

42 Section 2 How Business Complies with Laws and Regulations Tax obligations of business Tax and small business When running a small business, you have to pay Commonwealth as well as state or territory taxes. In most cases, if your business is a company, it pays lower tax. There are also other tax-related obligations. For example, you must submit an annual income tax return to the Australian Tax Office (ATO) for your business. If you operate as a sole trader, you must quote your own tax file number (TFN) when communicating with the Australian Tax Office. However, if you registered as a partnership, trust or company, your business must have its own TFN. Another requirement of businesses is to lodge a Business Activity Statement (BAS) with the ATO each month or quarter, depending on the size of your business. Most small businesses report every three months or quarterly. Failure to do so could mean paying a penalty to the ATO. To do this, you must register with the ATO to get an Australian Business Number (ABN) as well as to collect Goods and Services Tax (GST). The BAS lists business earnings and payments of various taxes. These include Goods and Services Tax (GST), Pay As You Go (PAYG) instalments, PAYG Withholding and Fringe Benefits Tax (FBT). Normally you pay your tax at the same time as submitting or lodging a BAS with the ATO. Note your BAS must quote your Australian Business Number (ABN). In summary, your business has to pay: income tax (Company Tax) Goods and Services Tax (GST) Pay As You Go (PAYG) withholding Fringe Benefits Tax (FBT) Capital Gains Tax (CGT) super Contributions stamp duty (state or territory) payroll tax (state or territory). The following table lists federal (Commonwealth) taxes you pay to the ATO as well as contributions. Page 36 of Innovation and Business Industry Skills Council Ltd

43 Student Workbook Section 2 How Business Complies with Laws and Regulations Commonwealth tax obligations and considerations Tax or charge Income Tax (Company Tax) Goods and Services Tax (GST) Pay As You Go (PAYG) withholding Fringe Benefits Tax (FBT) Capital Gains Tax (CGT) Superannuation Guarantee Contributions Comment Australia's company tax rate is 30% of a net or taxable income. Taxable income is equal to gross income less all deductions. Private income (non-business income) is taxed using rates that apply to income thresholds listed in tax rate tables on the ATO website. The company tax you pay quarterly or monthly is called a Pay As You Go (PAYG) instalment. GST is a 10% sales tax on the increase in the extra value a business contributes to the selling price of a good or service. If you register for GST with the ATO, you can claim the GST you pay on goods and services. This means you can deduct the GST you pay from the GST you collect on goods and services sold. This reduces the GST you pay to the ATO. GST may be paid monthly, quarterly or annually depending on the size of a business. Employers have to withhold tax before paying their employees. Employers then pay their employees tax to the ATO. This held amount is the Pay As You Go (PAYG) withholding. This includes income tax (calculated using tax tables), a 1.5% Medicare levy and potentially the repayment of student loans under the Higher Education Loan Programme (HELP). FBT is the tax paid on a benefit that a business pays to an individual because they are an employee. The ATO treats FBT separately from income tax. FBT has its own tax rates. The ATO treats CGT as part of income tax. The income earned from selling an asset whose price has increased less its cost, is added to the total income of an individual or company. The capital gain is then taxed according to income tax rates or company tax rates. Note a business has to hold an asset for more than one year before it is subject to CGT. Employers must pay a minimum of 9% of an employee's pay into a superannuation fund nominated by the employee Innovation and Business Industry Skills Council Ltd Page 37 of 128

44 Section 2 How Business Complies with Laws and Regulations Income Tax (Company Tax) Sole traders and partnerships pay tax as individuals calculated using personal income tax rates. Unlike individuals, they can reduce their taxable income by deducting costs and losses from previous trading periods. If you registered as a company, you pay a lower rate however. You only pay 30% of your business taxable income as tax. You pay this with your GST and FBT. Taxable income includes income from all sources less costs and other deductions. These deductions include expenses such as 100% of the value of accounting software or training and tax concessions. These concessions include depreciation of 33.3% of the value of equipment written off in a year. For example, you could deduct $300 from your income if you bought a $900 table for your boardroom. The income tax your business pays is called a Pay As You Go instalment. Sole traders normally pay PAYG instalments once a year, while small companies pay every quarter. A Pay As You Go instalment is a business tax payment. This not the same as Pay As You Go withholding that is the employee s income tax paid by their employer. Example: Company (Income) Tax Britney Meers recently registered her fashion business Swim Where? Pty Ltd. As it is cheap to do, she planned to sell her innovative swimwear to customers over the internet. After extensive market research with her boyfriend Jayme and his mates at the Boomdinyabba West Football Club, she discovered there was a desperate need for padded men s swimwear. Britney soon developed her brand she marketed as Budgie Snugglers and priced at $50 each. Her swimwear sold to thousands of customers. Over the year, she sold 10,000 items. This is averaged to 2,500 a quarter (three months). Britney submits her Business Activity Statement and pays tax quarterly. She assessed her cash inflow and outflow for the first quarter (the March Quarter). Her total income was 2,500 x $50, or $125,000. Britney s stock cost of $25,000 included all manufacturing and shipping costs from Tashkent, Uzbekistan. To calculate how much tax Britney had to pay, she worked out her assessable taxable income. Her assessable taxable income was $125,000 less the $25,000 deductible cost giving $100,000. Having registered Swim Where? Pty Ltd as a company, her business income is taxed at a corporate tax rate. The corporate tax rate according to the ATO is 30% (0.30). The tax to pay was 30% of her net income of $100,000: $100,000 x 0.30 = $30,000 Britney then lodged her BAS with the ATO and paid her Pay As You Go (PAYG) instalment of $30,000. Page 38 of Innovation and Business Industry Skills Council Ltd

45 Student Workbook Section 2 How Business Complies with Laws and Regulations Goods and Services Tax (GST) The Goods and Services Tax (GST) is a 10% sales tax on the increase in the extra value a business contributes to the selling price of a good or service. To collect GST you have to register for GST with the ATO. Once registered, you can claim the GST you pay on goods and services, which is called a GST credit. To do this, you would need to record details on tax invoices from other businesses that quote their ABN. This means you deduct the GST you pay from the GST you collect on goods and services sold. This reduces the GST you pay to the ATO. GST may be paid monthly, quarterly or annually depending on the size of your business. Most small businesses pay quarterly. If you bought a good or service for your business and used it privately, you can claim a GST credit for the amount it was used for business purposes. For example, if you use a power drill 80% of the time for your business, you can claim 80% of the GST credit (80% of the 10% GST on the drill s price). Businesses pay their GST to the ATO when they lodge their Business Activity Statement. Example: GST Outside of rural Nimbin, Helga Storviken raises llamas on her small farm to supply fine wool to nearby craft businesses. These businesses knit and crochet the fine wool into jumpers and legwarmers to sell to tourists. After three months trading as Flying Llama Textiles, she had to pay her GST. Helga first spent $40,000 to buy ten llamas. She paid GST that came to 10% of the $40,000 she spent. This $4,000 was her GST credit. This is the amount she could claim off her total GST payment. After selling bails of premium wool to her grateful customers, she earned $50,000. She then collected 10% of her $50,000 revenue, or $5,000 as GST. The amount Helga actually paid to the ATO was the difference between the GST collected ($5,000) and the GST credit she claimed back ($4,000). Helga then sent a cheque of $1,000 to the ATO and with her latest business activity statement (BAS) Innovation and Business Industry Skills Council Ltd Page 39 of 128

46 Section 2 How Business Complies with Laws and Regulations Pay As You Go (PAYG) withholding According to the Taxation Administration Act 1953 Schedule 1, payers have to withhold certain payments and transactions for income tax purposes. As an employer, you withhold a percentage of payments to: employees as salaries and wages contractors or sub-contractors you hire under a voluntary agreement labour hire workers suppliers who do not provide an Australian business number (ABN) investors in your business who do not quote their tax file number (TFN) who are due to receive interest or dividends investment distributions (profits) such as dividends, interest or royalties you pay overseas. You report and send these amounts to the ATO using the PAYG withholding system. In short, you call this withholding. Under withholding, an individual or business that makes a payment is a payer while a payee receives a payment. If you operate a business or pay employees governed by PAYG withholding, you must: register for PAYG withholding with the ATO confirm the status of your employees (for example, do they have an ABN) know which types of payments and transactions you need to withhold tax from decide how much to withhold report and pay withheld amounts to the ATO for a pay period (for example, fortnightly) send payment summaries (for example, BAS NAT 7394 each quarter) to the ATO lodge an annual report with the ATO at the end of each financial year. Note: The consequence for small business of not disclosing their ABN is severe. If you supplied stock to a retail business and sent an invoice for $1,000 with no ABN, you would receive only $515.This is because under withholding an invoice with no ABN has 48.5% of its total automatically taken out as tax and sent to the ATO. Registering and displaying your ABN is therefore wise to do. Example: PAYG Withholding Shane Finkle has just finished his first three months running his successful beauty parlour catering to dogs. It is April and Shane has to lodge his quarterly BAS and pay all due tax to the ATO. His company Doting Dogs only has one employee Zeki Turkul who specialises in blow waves, teeth whitening and psychotherapy. Page 40 of Innovation and Business Industry Skills Council Ltd

47 Student Workbook Section 2 How Business Complies with Laws and Regulations Zeki is a permanent employee on an annual salary of $40,000. Quarterly this is $10,000 ($40,000 4). From the ATO website, Shane looked up the following tax rates to work out how much tax he had to take out of Zeki s earnings to pay the ATO. This is Zeki s Pay As You Go Withholding. Tax rates (Australian Tax Office) Taxable income $0 $6,000 Nil Tax on this income $6,001 $34,000 15c for each $1 over $6,000 $34,001 $80,000 $4,200 plus 30c for each $1 over $34,000 $80,001 $180,000 $18,000 plus 40c for each $1 over $80,000 $180,001 and over $58,000 plus 45c for each $1 over $180,000 Shane considered the following. To calculate Zeki s PAYG withholding: her first $6,000 of earnings is not taxed 15% of the amount between her maximum income of $10,000 and the threshold income of $6,001 is the PAYG withholding ($10,000 $6,001) 0.15 = $ Shane then recorded Zeki s PAYG withholding amount of $ in his BAS. He then posted his March BAS with a $ tax cheque to the ATO. Fringe Benefits Tax (FBT) A fringe benefit is a benefit you provide to an individual or their associate because they are an employee. Fringe Benefits Tax (FBT) is the tax paid on the value of a fringe benefit. If your business operates as a company or trust, your directors and company secretaries may be employees. You might provide a fringe benefit when you: allow an employee to use a work car for private purposes give an employee a low-interest loan pay an employee s private health insurance provide cleaning services for an employee s private residence reimburse an expense incurred by an employee, for example, petrol entertain employees by providing food, drink or recreation. If you are likely to provide fringe benefits, you have to lodge a Fringe benefits tax Application to register with the ATO Form NAT Innovation and Business Industry Skills Council Ltd Page 41 of 128

48 Section 2 How Business Complies with Laws and Regulations FBT is separate from income tax and calculated using a separate rate. For example, FBT is 46.5% of the taxable fringe benefit for a full FBT year. In 2009, you would pay the tax after the end of the FBT year on 31 March. When you have paid FBT to the ATO at the end of an FBT year, you must also lodge a Fringe benefits tax (FBT) return ATO form NAT Example: Fringe Benefits Tax Andy Beaurepaire runs a plumbing business called Leakproof Australia. He employs two plumbers, Ryan Plugmore and his apprentice River Leakey. As the supervisor, Ryan drives the company van out to customer calls. As Ryan is a trusted employee and qualified plumbers are hard to keep, Andy allows Ryan to drive the van on weekends for private use. Andy s accountant Cecil Peabody told him the ATO was not happy with his last BAS statement and were going to audit his accounts. Cecil advised Andy to show due diligence and demonstrate the tax paid on fringe benefits was not underpaid. Andy then went through his calculations with some nervousness. His main concern was to calculate the value of the fringe benefit for the company van that was taxable. Andy had to consider a number of factors: the van was bought less than three years ago for $50,000 (Cecil calls this the base value ) it was driven more than 40,000 km over a full year Ryan s driver s log showed he used the van for personal use on 104 days Ryan paid nothing out of his own pocket to run the van. Andy was able to get a formula from the ATO web page: Fringe benefits tax for small business, Calculating the taxable value of a car fringe benefit using the statutory formula method He used the statutory formula with the following values: (A B C D ) E = V Page 42 of Innovation and Business Industry Skills Council Ltd

49 Student Workbook Section 2 How Business Complies with Laws and Regulations Values Description Amount A Base value of the car $50,000 B C Statutory percentage (determined by the total kilometres travelled in an FBT year see below*) Number of days in the FBT year when the car was used or available for private use of employees 7% 104 D Number of days in the FBT year (ends March 31) 365 E The employee contribution $0 V Taxable value $ (50, ) 0 = Total kilometres travelled during the FBT year * Statutory percentage Less than 15, ,000 to 24, ,000 to 40, Over 40,000 7 * Fringe benefits tax for small business, ATO website, Calculating the taxable value of a car fringe benefit using the statutory formula method Andy worked out $ was the value of the fringe benefit that could be taxed. According to the ATO, he has to pay 46.5% of the taxable fringe benefit as tax. Notably $ gave $ that Andy had to pay. Andy then completed and lodged an FBT Return with the ATO and sent a cheque to the value of his FBT Innovation and Business Industry Skills Council Ltd Page 43 of 128

50 Section 2 How Business Complies with Laws and Regulations Capital Gains Tax (CGT) The tax you pay on any increase in the value of an asset above its original cost is called Capital Gains Tax (CGT). Unlike FBT that is taxed separately, net capital gains are treated as a form of income. You add this to other business income before calculating tax at either a marginal or a company rate. To calculate your net capital gain, you: add the increase in the value of your asset after a full year subtract all capital losses including previous net capital losses subtract any CGT discount (depreciation) and small business CGT concessions. If you sold an asset for more than what you paid the cost base you make a capital gain. However, you make a capital loss if you earned less than the cost base. When you have more capital losses than gains over a year, you get a net capital loss. You can carry forward this net loss to later financial years and deduct these from future capital gains. There are no time limits on how long you can carry a net capital loss. Special rules apply when you work out gains and losses from depreciating assets. For example, the value of an asset may increase in line with inflation that is known as indexation. Asset prices may shrink by a specific discount rate; commonly you write off the value of office equipment after three years or 33.3% each year. Elsewhere, the net capital gain is just the difference between the capital proceeds and the cost base. If you have a business asset of value you can depreciate, the ATO treats any capital gain as income and capital losses as deductions however. Example: Capital Gains Tax Rosa Delizioso visits markets and swap meets in the hope of finding unusual and hopefully cheap items. She then sells these at her prestigious shop Ephemera in Malvern, Victoria. On New Years Day 2008, Rosa took a quick trip to Sydney and its Rocks Market. She spotted a rusty watch on a table next to a collection of handmade gnomes. After a little haggling, Rosa paid $1,000 to a seller who gave her the watch with a receipt. The seller thought he had made a fortune while getting rid of a useless watch. At home, Rosa polished her latest purchase to reveal its golden brass. She can now read the writing inscribed underneath. Earnshaw After a little research, Rosa realised she had a rare chronometer, a clock used to measure longitude at sea. Given the date, she also thought the explorer Matthew Flinders owned it. On Australia Day 2009, she sold the chronometer to a private buyer for $51,000. Having kept the rare chronometer for over a year, she had to pay capital gains tax. Page 44 of Innovation and Business Industry Skills Council Ltd

51 Student Workbook Section 2 How Business Complies with Laws and Regulations Half (50%) of the value of a capital gain is taxable. Rosa calculated this gain as the $51,000 she got from the sale less the $1,000 she paid. Her capital gain was $50,000. Fifty percent (50%) of this $50,000 is $25,000. This is the taxable amount. She added this to her company income for the year and paid tax on the total. Super contributions Individuals who are employers have to pay a superannuation contribution to their employee s superannuation fund according to the Superannuation Guarantee Administration Act Usually this contribution equals 9% of the amount an employee earns from their ordinary hours of work. Normally, you pay it every pay period, for example, fortnightly. You are an employer if you employ a full-time, part-time or casual worker using a verbal or written employment contract. In most circumstances, you pay super if your employees: are between 18 and 70 are paid $450 (before tax) or more for a calendar month work full-time, part-time or casually. If you work for yourself, you do not have to pay into your own superannuation fund. Most self-employed practitioners do however as they can deduct their super contributions from their taxable income until the age of 75. When you hire a contractors for their labour, you have to pay a superannuation contribution into their super fund even if they even if they quote an ABN. Employees may choose the super fund you pay into. Once your employee starts their new job, they have 28 days to choose a super fund and notify their selection using an ATO choice form NAT You then have two months to contact your employee s super fund and enable contributions to be paid. As part of your obligations, you have to keep extensive records. Your records must show: the amount of super you pay each employee how you calculate the level of super you pay you offer a choice of super funds to your employees. If you do not satisfy all your super obligations, you will be penalised. For example, you would have to pay a super guarantee charge to the ATO Innovation and Business Industry Skills Council Ltd Page 45 of 128

52 Section 2 How Business Complies with Laws and Regulations You pay this charge if you do not pay: enough super contributions (at least 9%) for each eligible employee super contributions by a cut-off (due) date for a payment super to funds that were chosen by employees. Example: Superannuation Contribution Shane Finkle s dog parlour Doting Dogs was going so well. As the demand was there, Shane decided to employ a fulltime receptionist Nanda Wok. Before doing this, he met with Cecil Peabody his accountant to sort out what to do next. At the meeting, Cecil told Shane under Commonwealth law as an employer he had to pay 9% of Nanda s ordinary time earnings into a superannuation fund of her choice. Cecil explained ordinary time earnings included all over-award payments, commissions, allowances and paid leave. He said Doting Dogs would pay into Nanda s super fund every fortnight when she got be paid. To do that, Shane would have to transmit Nanda s details including her Tax File Number as well as the paid amount. Cecil suggested Shane work out her annual salary with all her benefits and then scale it back to a fortnight. Shane mentioned her total package was $40,000 a year or $ a week. Cecil said this was would be $1, income a fortnight. Of this $1,538.46, 9% would go into Nanda s superannuation fund CWISF Canine Workers Industry Super Fund. Tapping his gold-plated calculator, Cecil worked out: $1, x 0.09=$ Cecil told Shane he would have to pay $ as his Superannuation Guarantee Contribution to Nanda s fund every fortnight. As this was the price of a couple of poodle perms, Shane said this was affordable and rang Nanda to offer her the job. State and territory taxes and charges Besides federal or Commonwealth taxes, businesses also have to pay levies imposed by state and territory governments such as duties and payroll tax. Depending where you operate your business, the amounts you pay vary. Each state and territory has its own income thresholds and tax rates used to calculate the duties or taxes you pay. State and territory revenue offices and their web pages have this information. Stamp duty Duties are state or territory taxes on transactions. A state or territory may call this duty a stamp duty, transfer duty or a general duty. To calculate a duty, you multiply the value of a transaction above the value of a tax-free threshold by a stated percentage rate. Page 46 of Innovation and Business Industry Skills Council Ltd

53 Student Workbook Section 2 How Business Complies with Laws and Regulations Rates vary for each state and territory. State and territory revenue offices all have web pages that list this information. In Victoria for example, the duty you pay on buying insurance is 10% of the value of an insurance premium (or price). The duty paid in Tasmania on the transfer of property is $6,550 plus $4 for every $100 for a property worth more than $225,000. Depending where your business is, you pay a duty when you: register or transfer the ownership of a vehicle pay a premium to buy insurance sign a lease or takeout a mortgage sign hire purchase agreement transfer the ownership of a business, real estate or shares. You do not pay duties on all transactions. Check with your state or territory revenue office to confirm which apply to you. Example: Motor Vehicle Duty (Victoria) DeMayne Ramsbotham-Smyth recently retired from his career as a profe ssional bungee jumper and decided he needed a more stable profession. Deciding to combine his love of Italian food with a new business, he identified a gap in the market. He would sell pizzas but deliver them in a Rolls Royce to customers in higher-income suburbs such as Toorak and Brighton in Victoria. If the business worked, he would open franchise businesses in Sydney and Hobart. To start with, DeMayne considered buying a Rolls. To do this, he also had to pay a duty to the state government Victoria s Motor Vehicle Duty in fact. He went home and searched the internet on his Apple Mac. He found he liked the Rolls-Royce Phantom Drophead Coupe. It was a convertible, had a 6.7litre V12 engine. As an automatic, he could drive while holding a pizza box. DeMayne considered $1,350,000 high for a Rolls but thought he could always get a loan from his mum and dad. After checking the Tax and Duty Rates web page of State Revenue Office Victoria, he pulled out his deluxe solar calculator he bought for $2 and did his sums. The Rolls-Royce Phantom is: new has a market price over the $57,009 threshold is a passenger vehicle. According to the SROV website, for a new vehicle: $5 is charged for every $200 of value (or 2.5%) of the first $57,009 $10 is charged for every $200 more than $57,009 or 5% of the excess Innovation and Business Industry Skills Council Ltd Page 47 of 128

54 Section 2 How Business Complies with Laws and Regulations The total duty was the sum of two calculations: $57, = $1, ($1,350,000 $57,009) 0.05 =$64, This was $1, $64, =$66, in duty to pay. DeMayne then decided, maybe a Fiat 500 could do the job. Payroll tax Depending how much they spend in wages, employers have to forward payroll tax to their state or territory revenue office. If your total Australian wage bill is greater than a set tax-free threshold or maximum deduction, you have to register and pay the tax. Normally you send a pay roll return (a summary report) and pay the tax monthly. Pay roll tax rates and minimum thresholds vary between the states and territories. To confirm these details, you would contact your state or territory revenue office. All offices display information on their own websites as well as advice on how to register. Example: Payroll Tax Bruce Podbury is an electrician and proprietor of Bright Sparks Electrical Pty Ltd. Thanks to a government-funded project to build retirement villages on top of shopping centres, Bruce and his ten employees have been busy. As his accountant Cecil Peabody prepared Bruce s business activity statement, he noticed Bruce now pays more than $550,000 a year in salaries. Cecil ed Bruce saying that he had to register his business with the state revenue office to pay payroll tax. This was because all his electrical work happened in the same state and he had a wage bill of more than $550,000. He explained the tax varied from state to state but normally it was a percentage of a total wage bill above a certain threshold. For example, it was 4.95% above a wage bill of $550,000 in Victoria while in Tasmania it was 6.1% above $1.01 million. Cecil warned that once Bruce registered Bright Sparks Electrical, he would have to lodge a return with the state revenue office and pay the tax every month. He could do it online, however. Page 48 of Innovation and Business Industry Skills Council Ltd

55 Student Workbook Section 2 How Business Complies with Laws and Regulations At the end of the financial year, he would have to report all tax paid in an Annual Reconciliation he would send to his state revenue office. After calming down, Bruce did his sums: he had a wage bill of $600,000 above the $550,000 threshold that is also called a maximum deduction monthly, his wage bill of $50,000 exceeded the $45,833 deduction he found on the SRO web page (for example, Victoria s) all his ten electricians worked for a full year as employees he had to pay 4.5% of his taxable monthly wage bill as payroll tax. Using the calculator feature on his iphone, Bruce performed the following: He subtracted the monthly maximum deduction from his monthly wage bill: $50,000 $45,833=$4,167 He then multiplied this difference by the payroll tax rate of 4.5%: $4, =$ Bruce then decided to register and pay his $ payroll tax. Learning activity: Calculate taxes and charges for UPM For Ultra Performance Motors, calculate its taxes and charges. Note: UPM employs 15 staff. Tax or Charge Calculate Commonwealth (Australian Federal Government) Goods and Services Tax (GST) UPM buys 4 Volkswagen Passats at $50,000 each and sells all of them at $60,000 each. What is the GST Ultra Performance Motors pays to the ATO? Super Contribution UPM employs a chief executive officer who is paid $100,000 a year. Calculate the quarterly Government Guarantee Super contribution UPM must pay to the CEO s superannuation fund Innovation and Business Industry Skills Council Ltd Page 49 of 128

56 Section 2 How Business Complies with Laws and Regulations Pay As You Go (PAYG) withholding Fringe Benefits Tax (FBT) UPM employs a chief executive officer who is paid $100,000 a year. He gets no leave loading. You have to calculate and report several amounts to the ATO for the March Quarter (first three months). Calculate the CEO s PAYG withholding amount for the quarter. Calculate the yearly value of the fringe benefit that is taxable for the managing director s company car. car s original or base value is $88,000 it was driven less than 15,000 km during the year (hint: this sets a Statutory Percentage) director s log showed he used the car for private use on 80 days. director has paid nothing out of his own pocket to run the company car. Use the ATO s statutory formula method. Income Tax (Company) UPM sells 4 Volkswagen Passats at $60,000 each. If UPM s deductible costs are $200,000 for the year, what is the company tax UPM has to pay? Capital Gains Tax (CGT) You buy an old MG convertible for $10,000 Despite needing minor repairs you think it can sell because it is a sports car. After 13 months, it does sell to a motor enthusiast who pays $32,000. Calculate the value of capital gain that is taxable. Page 50 of Innovation and Business Industry Skills Council Ltd

57 Student Workbook Section 2 How Business Complies with Laws and Regulations State or Territory Payroll Tax UPM has a wage bill of $560,000. All employees work a full year at UPM. What is the annual payroll tax to be paid (assume a rate of 4.95%)? Use the example from the presentation slide as a guide. Duty (Stamp Duty) A new BMW 6 series convertible sells for $85,009 in Victoria. What is the duty due? How business enforces compliance Compliance techniques Among the other regulations your business has to satisfy are occupational health and safety (OH&S) laws, regulations and codes of practice. Broadly, you have to show a duty of care. In the Australian Capital Territory OHS Act 1989, this means an employer shall take all reasonably practicable steps to protect the health, safety and welfare at work of the employer s employees. A business that fails to comply with OHS regulations can receive fines or a prohibition notice from a regulatory inspector that could shut down their operation. In Australia, the states and territories administer OHS regulation. Depending where you operate, you will communicate with a WorkCover, WorkSafe or Workplace Health and Safety office. You can use a number of techniques to make sure your business satisfies these laws: see Table 8: Compliance techniques. One of the benefits of knowing how to show your business complies with OHS is that you can apply these techniques elsewhere. For example, manufacturers use routine checking and monitoring of inspection reports to maintain quality control. With respect to OHS in your workplace, you need to: identify and satisfy the requirements of relevant OHS codes and laws set up and maintain a system for managing OHS 2010 Innovation and Business Industry Skills Council Ltd Page 51 of 128

58 Section 2 How Business Complies with Laws and Regulations set up hazard management strategies; these assess and control risks that come from workplace hazards, for example, you could distribute safe operating procedures to your employees keep OHS records as required by law specify and explain OHS duty of care responsibilities register with your state or territory workers compensation office as required. Compliance techniques Technique 1. Write a Health and Safety Policy 2. Assign OHS representatives 3. Identify codes of practice 4. Maintain a safe amenity (work environment) Comment The policy promotes cooperation between employers about OHS at work. It has reviewed procedures to check OHS policies work. Roles and responsibilities are specified. The number of representatives depends on the size of your work force. Representatives have powers under some OHS acts to: conduct inspections accompany WorkCover inspectors represent employees on OHS matters investigate OHS complaints access employer health and safety records. Different codes govern safe practices for different tasks and industries. For example, manual handling and lifting, labelling, operating industrial equipment, handling biohazards, working with dangerous substances and safety data reporting. Requirements in a code of practice become items to check in an OHS inspection report. Control noise, atmosphere and ventilation. Ensure sufficient lighting, clean and safe surfaces and prevent electrical accidents. Make entry and exits accessible and signed. Maintain first aid equipment and facilities. 5. Protect Install protective guardrails to prevent falls. Provide protective clothing and head gear. Page 52 of Innovation and Business Industry Skills Council Ltd

59 Student Workbook Section 2 How Business Complies with Laws and Regulations 6. Train Train OHS representatives in OHS and first aid. Train employees in OHS and emergency procedures. Conduct evacuation simulations and fire drills. 7. Monitor Conduct inspections of OHS. Produce injury and occurrence reports. Management evaluates findings and respond. Example: Occupational Health and Safety Compliance Zeki Turkul at Doting Dogs has not been well. Although her boss, Shane Finkle, was delighted with the hundreds of canine customers she washed and blowwaved, Zeki herself was in pain. Zeki went to her doctor Minnie Payne who examined her. Dr Payne worked out it was her lifting of Irish Wolfhounds and Rottweilers that strained her back. When Zeki showed bite marks on her arm, the doctor also told her to get a tetanus booster. Zeki explained she got them when she brushed the teeth of unneutered Pomeranians. The doctor demanded Zeki take time off work. Later Zeki told Shane she wanted to take sick leave. He was then worried no one was available to run the dog parlour. Having attended the WorkCover stand at last year s business expo, Shane thought there was a smarter solution to what he saw as an occupational, health and safety problem. Contacting the WorkCover Office, Shane got copies of two codes of practice: a code for manual handling and another for health care workers. As these codes listed good practices, Shane had a guide as to what was missing at Doting Dogs. Over the next week, he recorded the weights of his canine clients on an inspection report. At the end of the week, Shane discussed his findings with Zeki. He said work practices had to change. According to the health care code, Zeki would have to wear thick rubber gloves when handling dogs. He said he would put this requirement into a Doting Dogs Employee Induction Guide The inspection report showed 20% of dogs were over the maximum weight for safe lifting. Shane said this was unacceptable, however, he came up with an innovative OHS solution. Rather than buy a small crane to lift larger dogs into the hydro jet spa pool, he would install a raised wooden platform with a ramp. Zeki would then lead a dog up the ramp and into the pool. There would be no lifting. Shane thought this was an elegant solution. It meant Doting Dogs complied with industry codes of practice and saved him money. He worked out he could deduct the cost of the rubber gloves as a business expense. In addition, he could depreciate a third of the cost of the platform and ramp as a capital loss for this year. Thinking like a business practitioner, Shane also calculated that if Zeki did not take time off sick, his business could earn more and fund the platform in ten days. Shane said that in the end his OHS investment would put dollars in his pocket Innovation and Business Industry Skills Council Ltd Page 53 of 128

60 Section 2 How Business Complies with Laws and Regulations Learning activity: Design a compliance manual The director of Ultra Performance Motors commissions you as a highly paid consultant to write an Occupational Health and Safety Compliance Manual. You start with a table of contents. Advise the director as to what should go into it. Explain why it should be included. Heading Comment Page 54 of Innovation and Business Industry Skills Council Ltd

61 Student Workbook Section 2 How Business Complies with Laws and Regulations How a business controls risk Common risks governing small business OHS regulations put responsibilities on businesses to reduce the risk of harm in a workplace. Risk is the likelihood of a hazard causing harm. Hazards include any thing or action in a workplace that could harm people; see the table on the following page. These could be objects such as equipment or chemicals. How people do tasks can also be a hazard. For example, repeated manual lifting, creating noise and tiredness are hazardous. As a business proprietor, one of your roles is to be a risk manager. Risks and hazards that threaten small business Hazard confined spaces electricity excessive heat and cold explosive and corrosive substances: for example, petrol heavy lifting lack of protective clothing and gear, for example, for noise or radiation no first aid or emergency training no OHS manuals no OHS officer no OHS training no operator guides or procedure manuals no protective equipment, for example, scaffolding no safety data reported or monitored noise poisons and biohazards, for example, asbestos or contaminated food poor emergency signage poor lighting poor ventilation repeated manual tasks tired staff unsanitary amenities (toilets) untrained staff wet surfaces and floors Innovation and Business Industry Skills Council Ltd Page 55 of 128

62 Section 2 How Business Complies with Laws and Regulations How to manage risk an overview When businesses do not manage hazards, the risk of harm is high. As risk increases however, so does the likelihood of paying out costs and penalties related to injury. To protect yourself and your business, you need to perform risk management : see below. Overview of risk management 1. Identify Hazards 2. Assess Risks 3. Eliminate and Control Risks Successful risk management requires you to identify hazards, assess risks as well as eliminate and control risks. To identify a hazard, you need to ask is there anything or action that could cause harm. For example, if your employee used caustic soda (sodium hydroxide) to clean diesel oil from a car showroom floor, the hazard is a chemical. It could react with moisture to damage the eyes of staff. Caustic soda also produces hydrogen that could explode in unventilated spaces. You would report this. Next, you need to assess the reported information and decide how likely it is that a hazard will harm. You would balance the gains from performing a task with the risk of harm. For example, you need to work out how many people could get hurt and whether the layout of the workplace is dangerous. Finally, having assessed the risk of danger and injury, you need to respond. You would act to eliminate and control risk. For example, you might confine cleaning to outside business hours and make sure cleaning staff wear protective clothing and goggles. In addition, you might open the showroom s doors and windows during the cleaning. You might specify in an OHS Management Policy that cleaners have to use naturally based detergents that cannot corrode. Before you can give it to employees though, you have to write the policy. Page 56 of Innovation and Business Industry Skills Council Ltd

63 Student Workbook Section 2 How Business Complies with Laws and Regulations Strategies to control risk: OHS Before you write an Occupational Health and Safety Management Policy, you need strategies to describe. You might describe these as six steps. See the figure below. Steps to create an OHS management system Step 1: Identify those responsible for health and safety Step 2: Plan to work safely Step 3: Involve employees Step 4: Develop procedures Step 5: Train staff in procedures Step 6: Monitor, review and improve 2010 Innovation and Business Industry Skills Council Ltd Page 57 of 128

64 Section 2 How Business Complies with Laws and Regulations Steps to create an OHS Management System Strategy Step 1 Identify those responsible for health and safety Description Specify OHS requirements and responsibilities of managers, supervisors and employees. Also OHS officers if they exist. List required procedures and personal protective equipment (PPE). Explain how to report safety problems, incidents and injuries. Step 2 Plan to work safely Build OHS into your business practices. Make OHS a requirement when directing business activity. For example when: buying products free of specific chemicals buying ergonomic tables and workbenches changing lifting procedures using pulleys informing casual and contract workers of OHS procedures recording and reporting hazards monitoring, fixing and preventing incidents prepare for emergencies. Step 3 Involve employees Consult with employees when developing OHS policy. As they perform work tasks, they can tell you about specific hazards. They can suggest safe work procedures. Step 4 Develop procedures Write action plans to specify: what to do in what order who will do it when. Step 5 Train staff in procedures Specify OHS procedures taught to managers, supervisors and employees. State what has to happen to start training: for example, when to provide training and manuals. Demand contractors get a safe work induction before starting work. Page 58 of Innovation and Business Industry Skills Council Ltd

65 Student Workbook Section 2 How Business Complies with Laws and Regulations Strategy Description Step 6 Monitor, review and improve Evaluate the OHS Risk Management process. Confirm it does reduce the risk of harm or damage. Make sure everyone applies procedures properly. Execute risk assessments. Confirm: if a risk still exists if someone else was harmed from a risk that was fixed whether there should be a change to the work environment. Learning activity: Nover s OHS demonstration Watch the video BSBCMN311A: Demonstrating on IBSA s YouTube channel at <http://www.youtube.com/ibsachannel>. What specific OH&S information is the instructor explaining and demonstrating to the three employees? What is the importance of having this kind of on the job demonstration? 2010 Innovation and Business Industry Skills Council Ltd Page 59 of 128

66 Section 2 How Business Complies with Laws and Regulations Learning activity: Identify and control risks for OHS 1. Read the following scenario and identify the risk. Scenario: An employee at Ultra Motors has used caustic soda (sodium hydroxide) to clean diesel oil from a car showroom floor. Caustic soda is a chemical that can react with moisture to damage the eyes. Caustic soda also produces hydrogen that could explode in unventilated spaces. 2. As a manager at Ultra Motors, what are two of your main responsibilities in this case? 3. List strategies to control risk related to Occupational Health and Safety. Give examples appropriate for Ultra Performance Motors generally as well as considering the risk management required for the above scenario. Strategy Example Step 1 Step 2 Step 3 Page 60 of Innovation and Business Industry Skills Council Ltd

67 Student Workbook Section 2 How Business Complies with Laws and Regulations Strategy Example Step 4 Step 5 Step 6 Compliance legal documents Keeping good records is a legal requirement. The demands on your business will inevitably increase in relation to the necessary compliance of your business with a range of legislation, codes and regulatory requirements. You will become aware of the need to establish a system for carefully maintaining and managing these. Records may include matters pertaining to environmental planning, financial, OHS, personnel and taxation. The legal documents required for compliance are many and may range from appropriate software for financial records, certificate of incorporation, constitution documents, franchise agreements and financial documentation, partnership agreements to statutory books for companies. It is important that you devise systems and procedures to maintain and update relevant records to ensure their ongoing security and accessibility. In order to do this you will need to adhere to the different record keeping, reporting and auditing requirements of the various regulatory bodies that you will be dealing with. In relation to taxation, you can access some important information relating to this through the following document. Record Keeping for Small Business, Australian Taxation Office, viewed June 2010, <http://www.ato.gov.au/content/downloads/ bus76494nat3029.pdf>. There are benefits in keeping and maintaining records. The accounting process - reliant on record keeping, takes financial transaction data and produces financial reports that assist stakeholders in making informed decisions about the entity s financial performance and position. There are also considerable penalties for not keeping records, for example, for not keeping business records for the required five years. You will need to work out what system works best for you and your business needs. You can record information electronically or manually Innovation and Business Industry Skills Council Ltd Page 61 of 128

68 Section 2 How Business Complies with Laws and Regulations Electronic spreadsheet software has become a key tool used in the analysis of financial data. One popular form of this software is Microsoft Excel which apart from providing summations, additions, subtraction and percentage calculations also has inbuilt financial functions as well. Electronic spreadsheets also allow for easy creation of graphical displays that can convey a message to an audience in a far more effective way than the rows and rows of numbers. Even if you opt for electronic record management you will still collect paperwork and you will need to establish a good manual filing system that is understandable for you and others who need to access it. You may decide to consult with a bookkeeper to help you manage your records initially. Company records compliance Meeting the records requirements of the corporations law is an important consideration when advising clients of their obligations. Directors are made personally responsible for keeping proper company records. These could be grouped into financial records and company housekeeping records. Up-to-date financial records must be kept so that they can: correctly record and explain its financial transactions explain the company s financial position and performance. All companies must have financial records so that: the true and fair financial statements of the company can be prepared if needed financial statements can be conveniently and properly audited if necessary the company can obey the tax laws. A company would also normally prepare the following statements regularly: Statement of Financial Performance a statement showing the company s revenue and expenses and the profit or loss that results from these items Statement of Financial Position a statement showing the things of value the company owns and the debts the company owes, and Statement of Cash Flows a statement summarising cash inflows and outflows. Financial records may be kept electronically, provided they are capable of being converted into hard copy to anyone entitled to inspect them. Note: Small proprietary company (as defined in the Corporations Act) will generally not have to prepare formal financial reports under that Act each year and lodge them with ASIC. However, large proprietary companies, public companies and non-profit public companies must prepare financial reports, have them audited and lodge them with ASIC. Security Previously when considering risk management issues you have considered security in terms of the staff or the premises of UPM, however security also needs to be considered in relation to legal documents. In the event of fire or theft an electronic record keeping system is a better option as back-ups of all files and programs may be safely stored. Page 62 of Innovation and Business Industry Skills Council Ltd

69 Student Workbook Section 2 How Business Complies with Laws and Regulations It is important to identify a safe location, externally to your business and also to develop a system and timeframe to regularly update the files and programs. General information regarding security may be found on the Australia Taxation Office website. The section below provides necessary information relating to keeping electronic records secure: You must be able to show the records kept on your computer system are secure and accurate. This includes having: control over access to your computer; for example, through the use of passwords control over incoming and outgoing information control over processing of information back-up copies of computer files and programs and the ability to recover records if your computer system fails. Learn more: Compliant records for UPM As the director of Ultra Performance Motors you are now confident that you are compliant with all the required legislation, codes and regulatory requirements required to run your business. For example, you now have an Occupational Health and Safety Compliance Manual and all the associated paperwork. Also, you will have collected a range of forms relating to finance including tax obligations as well as company registration, insurance, a lease agreement, and a range of contracts. However, due to the large amount of paperwork you have gathered you notice that documents are becoming increasingly difficult to find and also you worry that in the event of an audit, or for recurring reporting requirements you might not be able to quickly access legal documents. You are also aware that in the event of fire or theft important documents might be completely damaged. You are experiencing considerable anxiety and you are wondering how you are going to cope when the business does really well and you know it will get busier and you will have less down time to attend to maintaining and updating records. Identify some steps that you will undertake to ensure the ongoing security and accessibility of these important legal documents. Use the Record Keeping for Small Business document at the following link as a general guide: Source: Australian Taxation Office, Australian Government, viewed June 2010, <http://www.ato.gov.au/content/downloads/bus76494nat3029.pdf> Innovation and Business Industry Skills Council Ltd Page 63 of 128

70 Section 2 How Business Complies with Laws and Regulations Learning activity: Multiple choice quiz Tick the correct answers. Question 1: A company is a registered: a. business operated by one person b. business operated by two people c. organisation with a trustee and unit holders d. business with a director and shareholders. Question 2: The Corporations Act specifies: a. business registration and reporting requirements b. occupational health and safety obligations c. minimum employment conditions d. taxes a business pays. Question 3: A GST is 10% of: a. the income of a company less its deductions b. the selling price of a good or service c. a capital gain d. the value of a fringe benefit. Question 4: (There are two correct answers) According to law, a business can obtain trading premises by: a. entering into a verbal arrangement with a friend or relative b. signing a lease with a real estate agent c. signing a rental agreement with a real estate agent d. a barter agreement. Page 64 of Innovation and Business Industry Skills Council Ltd

71 Student Workbook Section 2 How Business Complies with Laws and Regulations Question 5: If an injured person who is NOT a customer or an employee sues my business, what insurance cover pays out my costs? a. Product liability insurance b. Professional indemnity insurance c. WorkCover d. Public liability insurance. Question 6: If you were responsible for lowering accidents in your business which of the following strategies would be incorrect? a. Appoint a staff member to be responsible for health and safety b. Draft plans to work safely and ignore employees c. Write safety procedures and train staff in these procedures d. Monitor, review and improve these procedures. Question 7: (There are three correct answers) If you want legal advice for your business, you should contact a. accountants b. Commonwealth, State or Territory business departments c. Mates d. Solicitors. Section summary You should now understand how to make a business comply with the requirements of legislation, codes and regulations. Further reading Business, Australian Taxation Office, viewed June 2010, <http://www.ato.gov.au/businesses/> Motor Vehicle Duty Calculator, State Revenue Office Victoria, Victorian Government, viewed June 2010, <http://www.sro.vic.gov.au/sro/srowebsite.nsf/taxes_duties_motorvehi cle.htm> 2010 Innovation and Business Industry Skills Council Ltd Page 65 of 128

72 Section 2 How Business Complies with Laws and Regulations Risk Management, WorkCover Authority of New South Wales, NeW South Wales Government, viewed June 2010, <http://www.workcover.nsw.gov.au/documents/publications/ohs/risk% 20Management/risk_management_at_work_guide_0425.pdf> Below is a list of websites where you can research the requirements of OHS legislation as it applies in your state. When faced with trying to come up with a hazard control measure that will work in the situation as it exists at your worksite it can be very beneficial to visit the sites of other states as there are many tools and ideas that will assist enormously. o Australasian Legal Information Institute, viewed June 2010, <www.austlii.edu.au/> Section checklist o Safe Work Australia, viewed June 2010, <http://safeworkaustralia.gov.au/> o Comcare, Australian Government, viewed June 2010, <http://www.comcare.gov.au/> o Workplace Health and Safety Queensland, Queensland Government, viewed June 2010, <http://www.deir.qld.gov.au/workplace/> o NT Worksafe, Northern Territory of Australia, viewed June 2010, <http://www.worksafe.nt.gov.au/> o SafeWork SA, Government of South Australia, viewed June 2010, <http://www.safework.sa.gov.au/> o WorkSafe Victoria, Victorian Government, viewed June 2010, <http://www.worksafe.vic.gov.au/wps/wcm/connect/wsinterne t/worksafe/home/> o WorkCover SA, Government of South Australia, viewed June 2010, <http://www.workcover.com> o Workplace Standards Tasmania, Government of Tasmania, viewed June 2010, <http://www.wst.tas.gov.au/>. Before you proceed to the next section, make sure you are able to: explain why a business complies with laws and regulations identify laws and regulations that govern a business identify tax obligations of business explain how a business enforces compliance describe how a business controls risk. Page 66 of Innovation and Business Industry Skills Council Ltd

73 Student Workbook Section 3 Contracts and How to Negotiate Them Section 3 Contracts and How to Negotiate Them This section explains how to negotiate and arrange contracts to operate a business. Scenario: Secure a place to operate a business Having incorporated Ultra Performance Motors Pty Ltd., you and your board of directors need a showroom with an attached garage and office. The board prefers to invest the company s spare cash into buying Bugatti Veyron Grand Sport vehicles for later resale to the public. Buying a property is therefore not an option. As the general manager, you have to arrange the tenancy of a commercial premise with a real estate agent. UPM s business plan states that the business will trade from a showroom for at least five years. To secure this tenancy, you have to enter into a contract using an agreement. You are not sure which. The following section will assist you to: identify which contract will apply to this scenario evaluate the agreement required for the tenancy of a commercial premise understand how to negotiate and complete an application to lease the car showroom. What skills will you need? To work effectively with contracts in a business, you must be able to: communicate, create reports, keep records and consult with others apply literacy skills to interpret legal requirements, develop policies and procedures as well as analyse compliance information use research skills to investigate legal structures as well as taxation and insurance requirements employ time management skills to prioritise tasks and to meet key dates Innovation and Business Industry Skills Council Ltd Page 67 of 128

74 Section 3 Contracts and How to Negotiate Them Contracts and business Why a business makes contracts When you run your business, you will be selling and buying goods and services as well as formalising business relationships. For most transactions, you will write an agreement between yourself and another individual or company. This will be a contract between two parties. Civil law enforces contracts. This means there are consequences for breaking or breaching a contract where both parties do not agree to end a contract. If you break a contract, the other party (or signatory) could sue you for damages or other compensation. When you sell a good to a customer, you will provide a contract such as a bill of sale that lists what you deliver. It also states the rights of the customer. When you are the customer and you buy a good or a service, you will have a contract such as a contract of supply. This sets outs what you pay for. It also lists your rights as a purchaser. For example, a power company normally agrees to provide electricity and compensate you if a power outage results in you having to shut down your business. Before you sign a contract, you need to understand what the document actually contains. A contract can be binding for many years and you could pay a penalty if you breach its conditions (known as provisions). To protect your rights, it pays to know what to look for. For example, you need to identify the duties or obligations of all signatories. You must find out what rights will be exchanged. For example, a sale is a transfer of a property right from one individual to another. A lease is a temporary transfer of a right to use and exclude. Copyright, is the right to copy a created work. Before making an agreement, you might consider obtain legal advice. In all cases, you would not rush into making an agreement or signing a contract. You would do your own due diligence. Notably, you check each provision to make sure you understand what it says and how it affects your rights. You also only sign a contract if you do so freely. This is because courts will invalidate contracts where one party coerces another into signing a contract. Lawyers refer to these individuals as being under duress. Common contracts As you operate your business, many transactions you perform will require some form of contract. The following table lists those most businesses use. Page 68 of Innovation and Business Industry Skills Council Ltd

75 Student Workbook Section 3 Contracts and How to Negotiate Them Contracts and agreements made by businesses Contract or agreement Bill of Sale or Contract of Sale Employment or Workplace Agreement Commercial Lease or Tenancy Agreement Copyright Contract Licensing Agreement Franchise Agreement Dealership Agreement Right to acquire Property right Labour Tenancy of premises Copyright Right to sell or produce Business relationship Right to resell goods Comment This document states a seller sells a specific item of personal or real property they own to a buyer. Normally it specifies a date, locality and a value received. This document provides evidence that a title to personal property was transferred from a vendor (seller) to a buyer (vendee). It is an agreement between an employer and an employee that specifies rights and obligations of each party as well as conditions of employment. A lease or tenancy agreement is a contract between a tenant and a property owner or real estate agent. It states the amount of rent a tenant pays, the method of payment and how long a property will be rented. A lease also specifies the value of a bond and other conditions and rules. A lease or tenancy agreement can be a: Fixed Term agreement for a period Periodic agreement that is set weekly or monthly. Copyright includes the right to copy, publish, communicate (for example to broadcast or publish online) and perform publicly copyright material. It includes designs, words, images and music. It is aimed at preventing unauthorised reproduction of the original form in which an idea or information has been expressed by its creator. This agreement documents that one individual or company permits another to sell or produce a product or service that it owns. A licensor grants a license to a licensee in return for a fee or royalty payment. Sets out obligations and liabilities of a franchisor and franchisee and a fee paid to the franchisor. Sets out obligations and liabilities of a seller and dealer (reseller) and payment amounts to the seller Innovation and Business Industry Skills Council Ltd Page 69 of 128

76 Section 3 Contracts and How to Negotiate Them Contract or agreement Partnership Agreement Assignment of Trademark Agreement Right to acquire Business relationship Trademark use Comment Sets out obligations and liabilities of partners. This records that an individual or an Australian registered company assigns their trademark to another. The aim is for the individual or company receiving the use of the trademark to benefit from the goodwill associated with the assigning individual or company. Learning activity: Identify contracts for UPM s motor show Read the following case study and identify and list contracts required for UPM s motor show. At least six contracts will be required. Use the above table Contracts and agreements made by businesses to identify the required contracts. After reading the local car magazine, Top Steer, William Billy McLaren becomes worried. He reads the demand for performance sports cars has shrunk a bit. Given he is the marketing director for Ultra Performance Motors it is up to him to drum up new business. He has a brain wave. UPM will combine the joy of sports cars with low carbon polluting motoring. After an intense search on Google, Billy discovers a model he thinks UPM could sell the Tesla Roadster. This sports convertible is light with a carbon fibre body and is fully electric. Billy expects the Tesla will appeal to buyers who like things green and fast. At the next directors meeting Billy announces that UPM should become the local dealer for Tesla Motors. As part of next year s marketing strategy, he suggests UPM launch the Tesla Roadster at the motor show. The managing director, Snidely Grinblatt, thinks the idea is brilliant but there is a time constraint. He says he is about to take a cruise along the coast of Kamchatka and asks if there will there be any contracts he has to sign before he leaves. Billy explains if UPM is to be an exclusive dealer of Tesla vehicles, it has to create a dealership relationship with Tesla. He mentions he needs to book a booth at the convention centre as well as rent tables and chairs. For the show, Billy says he would like to hire promotional models rather than use staff so the patrons will not be scared off. At the booth, the models will distribute show bags containing Tesla tee shirts and brochures. To make the vehicle appeal to local patrons, Billy says the brochures should show a Roadster parked in front of Uluru. Snidely assesses the situation as he works out which contracts he needs. He announces his conclusions. At least seven contracts will need to be prepared. Billy rings his local solicitor, Wally McBeal, and tells him has some work for him. Wally says he could do with the work but first Billy needs to sign a service agreement! Page 70 of Innovation and Business Industry Skills Council Ltd

77 Student Workbook Section 3 Contracts and How to Negotiate Them Learning activity: Identify contracts for UPM s motor show What are the required contracts? Sources of legal advice Depending what you want your contract to deliver, you might pay for the services of a lawyer or an accountant to write up a contract. Most lawyers specialise so some may draft a contract of sale while others could draft an employment agreement. Accountants can also help prepare standard tax documents. Free advice does exist however. Government, industry and trade organisations provide information in publications and on their websites with no charge to the public. The following table lists advice sources that may be useful to you Innovation and Business Industry Skills Council Ltd Page 71 of 128

78 Section 3 Contracts and How to Negotiate Them Contract advice sources Sources Accountants Certified Practising Accuntants Australia, accessed 3/6/10, <http://www.cpaaustralia.com.au> Institute of Chartered Accountants in Australia, accessed 3/6/10, <http://www.charteredaccountants.com.au> Australian Competition and Consumer Commission, Australian Government, accessed 3/6/10, <http://www.accc.gov.au/content/index.phtml/ itemid/142>. For advice to ensure contracts comply with competition, fair trading and consumer protection laws. Australian Copyright Council, accessed 3/6/10, <http://www.copyright.org.au/> Fair Work Australia, Australian Government, accessed 3/6/10, <http://www.fwa.gov.au/>. Business Licence Information Service, accessed 3/6/10, <http://www.bli.net.au/>. Conveyancers, for real estate contracts of sale. Australian Institute of Conveyancers, accessed 3/6/10, <http://www.aicnational.com.au/index.htm>. Lawyers: business and commercial law employment and industrial Lawyers. Com.au, accessed 3/6/10, <http://www.lawyers.com.au/>. Small Business, AusIndustry, Australian Government, accessed 3/6/10, <http://www.ausindustry.gov.au/smallbusiness/pages/ home.aspx>. Specialisation Business contracts, tax documents Good trade practices Copyright Employment Licensing Property acquisition Contracts Contractual obligations Page 72 of Innovation and Business Industry Skills Council Ltd

79 Student Workbook Section 3 Contracts and How to Negotiate Them What you look for in a contract: rights to protect, liabilities and responsibilities Although contracts can be complicated, a simple method to understand them is to use a STOPS strategy. Identify the: S T O P S Scope of the requirement Type of good or services provided Other documents Payments Signatures What to look for in a contract Scope of the requirement What are the supplier s duties and obligations? What are the liabilities of the supplier when supply fails? What are the responsibilities of the client? What are the client s rights? For example, are there: o cooling-off periods o refunds o warranties. Detect specific requirements, for example a method of delivery. Note exemptions and exclusions. Type of good or services provided Identify - what is to be provided? How much is to be provided? When what delivery dates and what happens if a delivery is late? 0ther documents Contract documents that are referred: these are documents parties are assumed to have read before signing a contract (parties must read these) Innovation and Business Industry Skills Council Ltd Page 73 of 128

80 Section 3 Contracts and How to Negotiate Them Payments How much? When? Methods of payment. Extraordinary payments partial payments for partial delivery, bonus payments for early delivery; penalties for late delivery and refunds. Signatures Who (which parties) signs for the contract to be legal? In reading commercial contracts, you may come across terms that reappear frequently. Especially in sales contracts, you might come across the following terms. Common legal terms and principles Term Cooling-off period Exclusions Liability Party Refund Signatory Description A period during which a buyer can cancel a sales contract. If a buyer decides not to go ahead with the sale, they return a good to a seller and get their deposit back. A term that tries to exempt, limit or exclude the liability of a party for a breach of contract or negligence. Exclusions limit responsibility. An obligation belonging to an individual or business that results from past transactions. Settling a liability results in the transfer or use of assets, provision of services or paying an economic benefit in the future; for example, paying interest on loans from investors. An individual who directly enters into an agreement or contract. Contracts have a first party and a second party. Third parties are not part of an agreement or contract. They may benefit from a contract signed by the other two parties however. Consumers are entitled to a refund, exchange or repair from the place of purchase if goods are faulty. The refund refers to a return of the amount a buyer pays for a good or service. An individual who signs a contract or agreement. A signatory can sign as an individual or for an organisation. Page 74 of Innovation and Business Industry Skills Council Ltd

81 Student Workbook Sunset clause Warranty Section 3 Contracts and How to Negotiate Them A provision or condition that sets a date after which an agreement is no longer in effect. For example, a seller may state when a buyer no longer receives an after-sales service. An obligation or guarantee that a good or service sold to a buyer is described factually by a seller. As part of a warranty, the seller will repair or replace the good or service if it falls short of the warranty. All goods and services have a statutory warranty determined by state and territory laws. In addition, manufacturers often provide a manufacturer s warranty with their goods. Sometimes this warranty is called an express warranty. Learning activity: Identify contracts and rights Identify contracts needed and principle rights to acquire for different business requirements for your own business. You may refer to your actual business or, if you don t have one, use the sample business that you have identified in previous sections. Requirement Contract or Agreement Photos for a sales brochure Sell a product to a client Purchase products to sell 2010 Innovation and Business Industry Skills Council Ltd Page 75 of 128

82 Section 3 Contracts and How to Negotiate Them Premises (a place to trade) Employ staff How a business gets insurance cover Why a business needs insurance Although you can do many things to reduce the risk of harm or damage that threatens your livelihood, you cannot eliminate all risk. Unfortunately, some circumstances are simply not in your control. For example, if you ran a retail shop on a main shopping strip - the sewerage main under the road could block and flood your premises. More likely, a storm could cut all power leaving your workplace in the dark. To protect themselves from rare but possible catastrophes, individuals pay a fee called a premium to buy insurance cover. If a damaging event does happen to the owner of the cover, called the insured, an insurance company pays out an amount to the value of the cover. Recently, cruise ship companies have received insurance payouts to cover losses due to piracy off East Africa. Regrettably, as the problem gets worse, they will soon have to pay higher premiums. Insurance companies offer many types of cover they call insurance products. Broadly, these are labelled personal insurance, general insurance or credit insurance. Personal insurance relates to insuring against events that harm you as a person. For example, insuring against death (Life Insurance), accident (Trauma), sustained disablement (Total and Permanent Disability) and lost income (Income Protection). Credit insurance covers you if you cannot pay your mortgage, loan or credit card. For small business, general insurance is relevant. The most important insurance products in this category include: property insurance professional liability insurance business interruption insurance. Page 76 of Innovation and Business Industry Skills Council Ltd

83 Student Workbook Section 3 Contracts and How to Negotiate Them The following table summarises insurance you might buy to protect your business. Insurance products and types of cover Property Insurance Building and contents Burglary Fidelity guarantee Motor vehicle Provides compensation for lost or damaged property belonging to your business This covers losses or damage to a building, contents and stock due to various insured events. These include a fire, earthquakes, lightning, storms, impacts, malicious damage and explosions. Covers losses from stolen business assets. Business owners who leave their workplaces unattended find this useful. This covers losses from employees who embezzle or steal from their employer. All businesses have to insure to cover losses or damages by business vehicles to members of the public who are not employees or customers. Called third party injury liability insurance, insurers provide four types: 1. Compulsory third party (injury) Covers your costs if you have to pay claims for personal injuries and legal costs due to harm or damage caused by your vehicle. You must buy this when you register your vehicle. 2. Third party property damage Covers the costs you pay for damage to another person or to the property of others. It covers your legal costs but excludes repairs to your vehicle if you caused an accident. 3. Third party, fire and theft Covers the costs you pay to third parties for harm or damage to their property. It also covers the costs of repairing or replacing a vehicle after a fire or its theft. 4. Comprehensive Covers costs paid for all the previous events plus others. This includes the cost of repairing your own vehicle due to damage you caused in an accident. Finance companies insist you take this cover if you borrowed from them to buy your vehicle Innovation and Business Industry Skills Council Ltd Page 77 of 128

84 Section 3 Contracts and How to Negotiate Them Revenue Protection Machinery breakdown Business interruption Liability Insurance Public Liability Professional Indemnity Product Liability Workers Compensation WorkCover Provides compensation for lost or damaged revenue earning capacity This covers losses from your mechanical or electrical plant or machinery not working. This covers losses from your business being unable to trade because of property damage. The damage could be due to a fire or other insured events. This insurance ensures you have an emergency cash flow to pay your bills and keep your business going. Provides a payout to you if you compensate others for harm or damages your business may cause This insurance covers costs you pay to a third party for a death or injury, loss or damage of property or an economic loss caused by your negligence. Professional indemnity covers compensation and legal costs to clients who lost either financially or physically because of your negligent advice. This pays out costs to another business or individual due to a damage or injury caused by a product you sell or a failure of this product. Provides a payout to employees for a work related injury or disease your business may cause According to state and territory laws, you must provide workplace accident and sickness insurance to cover your employees. Called workers compensation, government insurers such as WorkCover provides this insurance. Learning activity: Insuring The Cavalry Watch the video BSBSMB401A: Insuring The Cavalry on IBSA s YouTube channel at <http://www.youtube.com/ibsachannel>. Eamon Mackie from Allianz talks to the owners of The Cavalry, a small IT business, about the importance of business insurance coverage. Why does Eamon Mackie recommend obtaining business insurance cover? Page 78 of Innovation and Business Industry Skills Council Ltd

85 Student Workbook Section 3 Contracts and How to Negotiate Them List and briefly describe the four types of insurance recommended to The Cavalry. Enter the appropriate insurance cover for each of the following scenarios. Scenario Insurance type The Cavalry has implemented a brand new IT system for a client but after a month the client reports that the system keeps crashing, causing their business a large amount of downtime. Due to flash floods The Cavalry have to spend money on temporary relocation to another office whilst their building is fixed. One of the employees at The Cavalry has developed a repetitive strain injury from computer work and needs to take sick leave. The Cavalry has provided technical advice to a client regarding the type of software to install but the software turns out to be incompatible with the business existing IT system, and they will now need to install a different version Innovation and Business Industry Skills Council Ltd Page 79 of 128

86 Section 3 Contracts and How to Negotiate Them How you get insurance A business getting insurance cover broadly follows the same process. (See the figure on the following page.) Going on quote to get and evaluate insurance How you get insurance the process 1. Identify risks of harm or damage Depending on your business activity and its location, you would have to figure out what potentially could harm or damage your business. The risks you face may apply to all businesses. For example, employees face workplace risks that relate to a work environment, equipment or processes. Some risks relate to what you sell. For example, if you deliver advice to clients as either a dietician or a financial adviser, clients could sue you if your advice was negligent. Notably, it was wrong and led to them losing their health or finances. Other risks could relate to your location. For example, your workplace could be in a town that is prone to bushfires or floods. Industry organisations are a good source of advice as to what risks you might experience as you conduct your business. (1) Identify risks of harm or damage (2) List required insurance cover (3) Source insurance products (4) Compare insurance products (5) Choose insurance products (6) Submit an insurance application (7) Receive a (temporary) Cover Note (8) Receive insurance cover (9) Pay a premium (10) Receive a Certificate of Currency 2. List required insurance cover After working out which risks threaten your business, the risks suggest the insurance cover you need. Some insurance will be compulsory. This includes WorkCover, public liability insurance and motor vehicle insurance for your commercial vehicles. The law may not require other insurance, but your client might demand it. For example, if you supply goods to a retailer, you may have to take out professional indemnity insurance. This pays the costs of your client if one of their customers claims costs for damages or losses caused by the goods you supplied. Finally, personal factors and confidence may govern which insurance cover you buy. For example, if you have family responsibilities, you might decide you cannot risk your business not earning and take out business interruption insurance. If your warehouse is not made of combustible materials, you might exempt fire as an insurance event from your building and contents insurance. Page 80 of Innovation and Business Industry Skills Council Ltd

87 Student Workbook Section 3 Contracts and How to Negotiate Them 3. Source insurance products Once you know what insurance cover you need, next you have to find out what cover insurances companies provide. Some insurers are specialised and may sell only one type of insurance such as travel or maritime insurance. Other companies such as AMP, Allianz or CGU offer broad insurance as well as other financial services. Normally you would get a Product Disclosure Statement (PDS) that describes the cover an insurer offers. This will be the insurance product or policy. Many insurers have websites that have PDS documents you can download and print. If you want further information about a PDS (e.g. whether different insurance cover can be bundled together with a discount), you would talk to an insurance agent. This agent represents a specific insurance company. Business operators with little time but more cash may decide to delegate the task of sourcing insurance to someone else. Many will pay a commission to an insurance broker to research and evaluate any insurance products that best satisfy the needs of the business operator. Note: There is a difference between the insurance agent and an insurance broker. An insurance agent represents an insurance company while an insurance broker is effectively your employee and represents your interest. 4. Compare insurance products After going on quote, you would assess at least three insurance products. You would compare the following features for each insurance policy. Evaluating insurance products What to look for in a policy Cost of insurance premiums. No-claim bonuses. Discounts, if available. What is covered. What is not covered (exclusions). Are terms and definitions comprehended? Is the cover too low - leaving you underinsured and exposed to risks? Will you be paid only for a proportion of a total loss? When protection starts: Immediately or after a set period? Conditions of insurance: Are there specific exclusions such as acts of God? Claims procedure: How to get paid. Terms of replacement: Any limits on the amount an insurer will pay to replace an item. Renewal conditions: How the premium and the value of cover change over time, e.g. do your assets depreciate or are they indexed according to inflation (or increase with the Consumer Price Index)? Reputation: Ensure insurer has a good track record and history. Customer responsiveness: Does an insurance agent discuss your insurance needs with you without coercing you with a hard sell? 2010 Innovation and Business Industry Skills Council Ltd Page 81 of 128

88 Section 3 Contracts and How to Negotiate Them 5. Choose insurance products After assessing which insurance product or products gives you the most cover for the premium you are willing to pay, you select the insurance you want to buy. 6. Submit an insurance application Next, you fill out an insurance application and send it your insurance agent. Some insurers allow you to do this on their webpage. 7. Receive a (temporary) Cover Note Depending on the insurance, an insurer may give you immediate cover. In this situation, the insurer sends you a cover note as evidence you are covered in the short run. 8. Receive insurance cover Later, after the insurer approves your application, the insurer informs you that they will officially insure you. 9. Pay a premium Next, you pay the premium that buys the insurance cover. 10. Receive a Certificate of Currency To provide proof that confirms you are insured, the insurance company sends you a Certificate of Currency. You use this to show you have insurance: for example, if a client wants to know you have professional indemnity insurance. Example: Getting Insured Verity Moneypenny is an insurance broker who runs a successful business in Perth. For her first appointment, she welcomed a new client, Magnus Blade. Magnus explained he has just gone into business as a sword swallower and fire-breather. He reported that last month he performed at the Fremantle Street Arts Festival and the crowds were delighted. Not only did they clap, they threw hundreds of dollar coins into a small cart pulled by Delilah, his singing Kelpie. Verity asked Magnus what he was after. He said he was about to perform in Melbourne by the Yarra River. This in itself was not a problem but there were risks that could threaten his ability to earn. As it was colder, he could get a throat infection that could stop his sword swallowing. Melbourne s weather could also mean a sudden down pour would extinguish his fire breathing. Magnus complained that he did not have the time to talk to dozens of insurance agents as he was preparing to drive his VW Microbus across the Nullarbor. He admitted he did not know what cover to buy and it was giving him a headache. Because of this, he needed to talk to an insurance broker in a hurry. Page 82 of Innovation and Business Industry Skills Council Ltd

89 Student Workbook Section 3 Contracts and How to Negotiate Them Verity said she would prepare a recommendation of three possible insurers from which he could choose a policy. These insurers would provide the best bundle of insurance coverage to protect Magnus from risks he is likely to face. Also at premium he is willing to pay. Verity explained what insurance cover Magnus should buy. As he has assets such as a sword, costumes and a torch that help him earn, he should take out contents and burglary insurance. As Delilah is a dog and not an employee; Magnus will not have to pay WorkCover. As an alternative, Verity suggested he take out pet insurance that is a form of contents insurance. Comprehensive motor vehicle insurance is also a good idea as his VW is essential for getting him to his places of work. In case he could not work because of factors outside of his control, he should have business interruption insurance. This would be useful on days of total fire ban. As his fire breathing could scorch members of his audience, in case they sued, Magnus should buy public liability insurance. Finally, in case he was working for a festival organisation and members of the public sued the festival, he should take professional indemnity insurance. Magnus said that was a lot of protection to pay for. Verity said he should not worry. He could claim the premiums as tax deductions. The extra protection would also help him sleep better. Learning activity: Choose insurance Identify which insurance protects Ultra Performance Motors for each scenario below. Scenario Insurance product 1. A potential customer slips on a recently cleaned floor in the showroom and breaks her hip. 2. A van UPM sells to a pizza delivery company has a fault causing the delivery company to lose business. 3. A staff member slips on a recently cleaned floor in the showroom and breaks his hip Innovation and Business Industry Skills Council Ltd Page 83 of 128

90 Section 3 Contracts and How to Negotiate Them 4. A lit cigarette butt causes the ladies toilet to go up in flames 5. The general manager drives his company car into the back of a stationary Volvo 6. A possum jumping between powerlines cuts power to the showroom. Power is not restored for two days. 7. The cleaner accidently pours cleaning fluid on the cash register that melts its keyboard. 8. The general manager drives his company car into the showroom s front window. How a business gets a premise Ways to get a location for a business Once you have satisfied all the legal obligations of setting up your business and worked out the costs of protecting it with insurance, you will need a workplace. What you intend to sell and its volume will decide where you conduct your business. For example, if you sell or repair clothes, furniture or computers you might consider a small shop off a main street. Bakeries, food retailers and hairdressers might locate in shopping centres with a higher volume of passing trade. If you hire barbecues or tools, you could locate away from population centres but you would need access to a car park. Carpet cleaners and photographers, who work mainly at their clients venues, still need space for an office to manage the business from, and to store their equipment. Clothing manufacturers do not need a shop to sell to retailers. They do need space however, such as a factory warehouse to make and store their goods. Some can run a home-based business; for example, they could convert a spare room or garage into a workspace. It might be the case that you will have to acquire a business premises by paying for one. One option is to buy a business premise or location to conduct business. Known as buying the freehold title, this is the most expensive and least flexible but offers the most security as you own the property. Page 84 of Innovation and Business Industry Skills Council Ltd

91 Student Workbook Section 3 Contracts and How to Negotiate Them For most small businesses on limited budgets, the most common method is to rent directly from a property owner or a real estate agent. This could be for a fixed period on an ongoing basis for example, you could pay rent monthly. If you wanted to do this, you would have to sign a commercial lease agreement. This lease is a contract between a landowner, called a landlord or lessor, and an occupier of land called the tenant or lessee. It lists premises, all parties to the agreement with their rights and obligations: see below for parts of a Lease Agreement. Parts of a lease agreement parties involved lessor and lessee premises location and facilities rent value duration of a tenancy rental bond value holding deposits if any an initial deposit to confirm an agreement payment of rent when it is due responses to the damage and repairs to the premises alterations and the permitted use of premises assignment or sub-letting allows a lessee to rent space to a sub-lessee landlord s right of entry insurance requirements grounds for termination of the lease. An alternative to leasing a venue might be to rent part of a space already rented to another business. Real estate agents call this sub-letting. In this situation, you would have to sign a sub-lease agreement. Whether you can do this depends on whether a landowner permits assignment or sub-letting in an original lease. Where to get advice Small business departments of each state and territory government advise what to look for in a commercial lease agreement. They also recommend what information you need before applying for one. All have websites with guides you can download. Guidance on commercial leasing is provided for members of Retail industry associations such as: National Retail Association The Retailers Association Shopping Centre Council of Australia Property Council of Australia 2010 Innovation and Business Industry Skills Council Ltd Page 85 of 128

92 Section 3 Contracts and How to Negotiate Them Other sources of advice include real estate agents as well as professional (paid) advice from solicitors and lease lawyers. Evaluating lease and rental agreements In deciding whether a lease agreement is acceptable, you have to consider the: space you need rent you can pay how long a lease is how to renew it zoning restrictions that limit your business practices payment of outgoings for example, who pays council rates, water costs, security, maintenance, legal fees and stamp duties Evaluating a lease agreement Rent Other outgoings (other expenses) Other obligations Does rent include outgoing expenses; if so, do you pay regularly or once a year? How and when does your rent increase? If the premises become unusable, or your use of it is disrupted, do you keep paying rent? How can you get out of the lease? Can the landlord terminate the lease? Must you pay a security bond or deposit (normally you pay three months rent as a bond)? What equipment or services are included? Who pays for repairs and maintenance; is it shared; does the landlord pay for wear and tear and structural repairs? What happens when the lease ends? Do you have to redecorate your workplace and what standards are expected? Do general rules apply equally to all tenants in a building or shopping centre? Must there be guarantees from individuals or a bank to pay the landlord if you break the terms of the lease? If the landlord claims you didn t pay your rent, how much notice do you get before the landlord terminates the lease? Are you given the opportunity to pay the default rent? Page 86 of Innovation and Business Industry Skills Council Ltd

93 Student Workbook Permitted use and access Location and building layout Insurance Dispute resolution Section 3 Contracts and How to Negotiate Them Are there similar businesses in the same shopping centre or location does the lease state whether the landlord promises not to allow competitors into the same building? Must you hold specific licences to run your business? Does the local council impose zonings that restrict your business activities? When can you enter the premises does the landlord or council restrict access or can you set your opening hours? Does the permitted use allow for you to expand or sell your business? Does the description of the premises describe exactly the space you will occupy does it set out your rights to use common areas and facilities such as car parking for you, your staff and visitors? Does the location and space satisfy your business needs? Will the landlord have to change the building to enable your business to operate or comply with the law; who pays for this change and any ongoing maintenance? If you require a shop to be fitted-out (for example with shelves and partitions), what is needed, who approves it, maintains it and pays for it; and at the end of a lease must you remove the fit-out? Do you have to take out insurance; for example, public liability or contents insurance to cover damage; do you have to get consent from the landlord for changes or activities that could affect his or her insurance cover? Do you have to pay part of the landlord s insurance premiums as well as your own? How do you resolve a disagreement if you are not talking to the landlord or their representative (real estate agent)? 2010 Innovation and Business Industry Skills Council Ltd Page 87 of 128

94 Section 3 Contracts and How to Negotiate Them Example: Getting a showroom Because the directors at Ultra Performance Motors expect the economy to pick up next year, the directors voted at their last meeting to set up a second dealership in the west of the city. The directors gave the task of establishing the new showroom to the marketing manager, Billy McLaren, who in turn delegated the job to his assistant manager Lucretia Thornquist. In the filing cabinet, she found UPM s existing commercial lease agreement made with Bumpstead and Pratt Real Estate. Using the existing commercial lease as an example, Lucretia questioned Billy to make sure he had sufficient information to fill out a new lease. Eventually he would sign the lease. Lucretia asked a number of questions. She noted Billy s responses. How much space does UPM need? A ground floor display area of 520 square metres with an office of 100 square metres that can be on a first floor. What rent can UPM can pay? Roughly $108,000 a year or $9,000 a month. How long should the lease be? Starting off, 5 years with an option to renew. What council-zoning permit is needed? The zoning should at least be for mixed use: for example, to allow residential and light industrial activity that permits a car dealership to operate. What outgoing expenses should the landlord pay? UPM will pay water and security costs. The landlord can pay ongoing maintenance. Legal fees and stamp duty are negotiable. Does the real estate agent have to satisfy any other obligations? Ask the real estate agent if other dealerships are setting up nearby. Mention UPM has a bank guarantee to pay the landlord if it breaks the lease although this is unlikely. What usage and access does UPM need? UPM will trade during business hours including on weekends. Visitor car parking is needed; street parking would be useful. Page 88 of Innovation and Business Industry Skills Council Ltd

95 Student Workbook Section 3 Contracts and How to Negotiate Them Where should the showroom be located and what building is needed? A visible location on a main road would be useful. UPM will repaint interiors in the company colours and install office fittings. The office does not have to be at ground level. The landlord must be willing to approve these alterations that UPM will pay for. What is the status of UPM s insurance cover? UPM will take out more contents insurance, public liability insurance and, with more employees, WorkCover. Mention UPM would like to install burglar alarms. Once installed, the lower risk should enable the landlord to pay smaller insurance premiums. How do you want disputes resolved? Confirm what happens if UPM disagrees with the implementation of the lease: for example, if rents increase too frequently. UPM is willing to accept mediation by others, for example, a government commercial and consumer tribunal if it is needed. After making appointments with several real estate agents, she headed west in her sky blue Astin Martin convertible to check out possible showrooms. She knew it was going to be a long day but at least she was prepared. Learning activity: Fill out a lease Fill out an application to lease a car showroom. See Appendix 3 Commercial Lease Agreement for the required application Innovation and Business Industry Skills Council Ltd Page 89 of 128

96 Section 3 Contracts and How to Negotiate Them Section summary You should now understand how to negotiate and arrange contracts to operate a business. Further reading Insurance provider websites catering to business: o Small Business Insurance, Allianz, viewed June 2010, <http://www.allianz.com.au/allianz/business+insurance.html> o Business Insurance, AAMI, viewed June 2010, <http://www.aami.com.au/business-insurance/about-our-businessinsurance/business-insurance.asp> o Products & Services ANZ Commercial Insurance, ANZ, viewed June 2010, <http://www.anz.com/small-business/productsservices/commercial-insurance/>. Commercial property leasing, Department of State and Regional Development, New South Wales Government, viewed June 2010,<http://www.smallbiz.nsw.gov.au/run/operations/leasing/pages/c ommercialpropertyleasing.aspx>. Leasing a Retail Premises, Business Victoria, Victorian Government, viewed June 2010, <http://www.business.vic.gov.au/busvic/standard //pc=pc=pc=pc=pc_50064.html>. Retail Lease Agreement Checklist, Business Victoria, Victorian Government, viewed June 2010, <http://www.business.vic.gov.au/busvicwr/_assets/main/lib60208/sbv_ checklist_lease_agreements.pdf>. Section checklist Before you proceed to the assessments, make sure you can: explain where to get legal advice identify what to look at when evaluating a contract explain how a business makes contracts and why describe how a business gets insurance cover advise how a business acquires premises. Page 90 of Innovation and Business Industry Skills Council Ltd

97 Student Workbook Glossary Glossary Term Code of Practice Cooling-off Period Copyright Due Diligence Duty of Care EEO Going concern Incorporation Intellectual Property Liability Liquidator(s) Definition A documented set of recommended processes, actions or organisational structures that members of a particular trade or profession are expected to perform. A period during which a seller and buyer in an agreement or contract can rethink their circumstances and cancel the purchase without a penalty being paid. A collection of laws that regulate the use of the work of a creator such as an artist or author. These govern the distribution, changing and display of creative, literary and other created works. Is the verification of information and its documentation used to make a business decision, for example, the purchase of stock that satisfies a standard. A legal obligation imposed on an individual that requires that they apply a standard of reasonable care while performing any act that could predictably harm others. A breach of a duty of care could be considered negligence and subject to civil action. Equal Employment Opportunity Currently operating business that is expected to continue to function as such and remain viable in the foreseeable future. Method by which individuals are voluntarily united into a new entity through the creation of an artificial, intangible, and legal person called corporation. Any intangible asset composed of human knowledge and ideas. A legal obligation of an individual or company to pay a debt. Person appointed by the shareholders or unsecured creditors, or on a court order, to manage the winding up of a firm by selling off its assets 2010 Innovation and Business Industry Skills Council Ltd Page 91 of 128

98 Glossary Term Mentor Officeholder OHS Patent Proprietor Provision Royalty Third Party Tort Warranty Definition A person (often more senior or experienced) who takes an interest in someone s career and provides positive help, support, advice and encouragement. Director or secretary of a company Occupational Health and Safety A set of exclusive rights to an invention granted by the government to an inventor. A proprietor is an individual who exercises private ownership over who controls or uses an item of property. A clause, normally in a legal document, contract or agreement that specifies a requirement of something specific, for example, an obligation or condition. A payment to the holder of a patent, copyright or resource for the right to use their property. An individual involved in an event, legal transaction or agreement only by accident or indirectly. A wrongful act, injury, or damage (not involving breaking a contract) that an aggrieved party can seek compensation for according to civil law. Tort laws govern wrongful acts, other than breaches of a contract, by one person against another or his or her property. Civil action such as suing for negligence can be made using these laws. A guarantee by a seller that sold goods or property are represented as promised. Page 92 of Innovation and Business Industry Skills Council Ltd

99 Student Workbook Appendices Appendices Appendix 1 Sample business plan 1 Example Business Plan Note: This business plan example is supplied for information purposes only. View the original version and further examples of other business plans: Free Sample Business Plans, Bplans.com, viewed June 2010, <http://www.bplans.com/sample_business_plans.cfm>. Bakery Business Plan Jolly s Java and Bakery. Executive Summary Introduction Jolly s Java and Bakery (JJB) is a start-up coffee and bakery retail establishment located in southeast Melbourne. JJB expects to catch the interest of a regular loyal customer base with its broad variety of coffee and pastry products. The company plans to build a strong market position in the town, due to the partners industry experience and mild competitive climate in the area. JJB aims to offer its products at a competitive price to meet the demand of the middle-to higher-income local market area residents and tourists. The Company JJB is registered as a trading name in the state of Victoria. It is equally owned and managed by its two partners. Mr Austin Patterson has extensive experience in sales, marketing, and management, and was vice president of marketing with both Jansonne & Jansonne and Burper Foods. Mr. David Fields brings experience in the area of finance and administration, including a period as chief financial officer with both Flaxfield Roasters and the national coffee store chain, BuzzCups. The company intends to hire two full-time pastry bakers and six part-time baristas to handle customer service and day to day operations. Products and Services JJB offers a broad range of coffee and espresso products, all from high quality Columbian grown imported coffee beans. JJB caters to all of its customers by providing each customer coffee and espresso products made to suit the customer, down to the smallest detail. The bakery provides freshly prepared bakery and pastry products at all times during business operations. Six to eight moderate batches of bakery and pastry products are prepared during the day to assure fresh baked goods are always available Innovation and Business Industry Skills Council Ltd Page 93 of 128

100 Appendices The Market The retail coffee industry in Australia has recently experienced rapid growth. JJB wants to establish a large regular customer base, and will therefore concentrate its business and marketing on local residents, which will be the dominant target market. This will establish a healthy, consistent revenue base to ensure stability of the business. In addition, tourist traffic is expected to comprise approximately 35% of the revenues. High visibility and competitive products and service are critical to capture this segment of the market. Financial Considerations JJB expects to raise $110,000 of its own capital, and to borrow $100,000 guaranteed by the SBA as a ten-year loan. This provides the bulk of the current financing required. JJB anticipates sales of about $491,000 in the first year, $567,000 in the second year, and $655,000 in the third year of the plan. JJB should break even by the fourth month of its operation as it steadily increases its sales. Profits for this time period are expected to be approximately $13,000 in year 1, $36,000 by year 2, and $46,000 by year 3. The company does not anticipate any cash flow problems. Company Summary JJB is a bakery and coffee shop managed by two partners. These partners represent sales/management and finance/administration areas, respectively. The partners will provide funding from their own savings, which will cover start-up expenses and provide a financial cushion for the first months of operation. A tenyear Small Business Administration (SBA) loan will cover the rest of the required financing. The company plans to build a strong market position in the town, due to the partners industry experience and mild competitive climate in the area. 2.1 Company Ownership JJB is registered as a partnership. It is equally owned by its two partners. 2.2 Company History JJB is a start-up company. Financing will come from the partners capital and a ten-year SBA loan. The following chart and table illustrate the company s projected initial start-up costs. Page 94 of Innovation and Business Industry Skills Council Ltd

101 Student Workbook Appendices Products JJB offers a broad range of coffee and espresso products, all from high quality Columbian grown imported coffee beans. JJB caters to all of its customers by providing each customer coffee and espresso products made to suit the customer, down to the smallest detail. The bakery provides freshly prepared bakery and pastry products at all times during business operations. Six to eight moderate batches of bakery and pastry products are prepared during the day to assure fresh baked goods are always available. Market Analysis Summary JJB's focus is on meeting the demand of a regular local resident customer base, as well as a significant level of tourist traffic from nearby highways. 4.1 Market Segmentation JJB focuses on the middle- and upper-income markets. These market segments consume the majority of coffee and espresso products. Local Residents JJB wants to establish a large regular customer base. This will establish a healthy, consistent revenue base to ensure stability of the business. Tourists Tourist traffic comprises approximately 35% of the revenues. High visibility and competitive products and service are critical to capture this segment of the market Market Analysis The chart and table below outline the total market potential of the above described customer segments. 4.2 Target Market Segment Strategy The dominant target market for JJB is a regular stream of local residents. Personal and expedient customer service at a competitive price is key to maintaining the local market share of this target market Market Needs Because Melbourne has a multi-cultural population, coffee products are very much in demand. During the remaining warmer four months of the year, iced coffee products are in significantly high demand, along with a slower but consistent demand for hot coffee products. Much of the day s activity occurs in the morning hours before 10 am, with a relatively steady flow for the remainder of the day. 4.3 Service Business Analysis The retail coffee industry in the Australia has recently experienced rapid growth. Despite low competition in the immediate area, JJB will position itself as a place where customers can enjoy a cup of delicious coffee with a fresh pastry in a relaxing environment Innovation and Business Industry Skills Council Ltd Page 95 of 128

102 Appendices Competition and Buying Patterns Competition in the local area is somewhat sparse and does not provide nearly the level of product quality and customer service as JJB. Local customers are looking for a high quality product in a relaxing atmosphere. They desire a unique, classy experience. Leading competitors purchase and roast high quality, whole-bean coffees and, along with Italian-style espresso beverages, cold-blended beverages, a variety of pastries and confections, coffee-related accessories and equipment, and a line of premium teas, sell these items primarily through company-operated retail stores. In addition to sales through company-operated retail stores, leading competitors sell coffee and tea products through other channels of distribution (specialty operations). Larger chains vary their product mix depending upon the size of each store and its location. Larger stores carry a broad selection of whole bean coffees in various sizes and types of packaging, as well as an assortment of coffee- and espressomaking equipment and accessories such as coffee grinders, coffee makers, espresso machines, coffee filters, storage containers, travel tumblers and mugs. Smaller stores and kiosks typically sell a full line of coffee beverages, a more limited selection of whole-bean coffees, and a few accessories such as travel tumblers and logo mugs. During fiscal year 2000, industry retail sales mix by product type was approximately 73% beverages, 14% food items, 8% whole-bean coffees, and 5% coffee-making equipment and accessories. Technologically savvy competitors make fresh coffee and coffee-related products conveniently available via mail order and online. Additionally, mail order catalogues offering coffees, certain food items, and select coffee-making equipment and accessories, have been made available by a few larger competitors. Websites offering online stores that allow customers to browse for and purchase coffee, gifts, and other items via the Internet have become more commonplace as well. Strategy and Implementation Summary JJB will succeed by offering consumers high quality coffee, espresso, and bakery products with personal service at a competitive price. 5.1 Competitive Edge JJB s competitive edge is the relatively low level of competition in the local area in this particular niche. 5.2 Sales Strategy As the following charts and table show, JJB anticipates sales of about $491,000 in the first year, $567,000 in the second year, and $655,000 in the third year of the plan. Page 96 of Innovation and Business Industry Skills Council Ltd

103 Student Workbook Appendices Sales Forecast Unit Sales Espresso Drinks 135, , ,350 Pastry Items 86,000 94, ,060 Other Total Unit Sales 221, , ,410 Unit Prices Espresso Drinks $3.00 $3.15 $3.31 Pastry Items $1.00 $1.05 $1.10 Other $0.00 $0.00 $0.00 Sales Innovation and Business Industry Skills Council Ltd Page 97 of 128

104 Appendices Espresso Drinks $405,000 $467,775 $540,280 Pastry Items $86,000 $99,330 $114,726 Other $0 $0 $0 Total Sales $491,000 $567,105 $655,006 Direct Unit Costs Espresso Drinks $0.25 $0.26 $0.28 Pastry Items $0.50 $0.53 $0.55 Other $0.00 $0.00 $0.00 Direct Cost of Sales Espresso Drinks $33,750 $38,981 $45,023 Pastry Items $43,000 $49,665 $57,363 Other $0 $0 $0 Subtotal Direct Cost of Sales $76,750 $88,646 $102,386 Management Summary Austin Patterson has extensive experience in sales, marketing, and management, and was vice president of marketing with both Jansonne & Jansonne and Burper Foods. David Fields brings experience in the area of finance and administration, including a stint as chief financial officer with both Flaxfield Roasters and the national coffee store chain, BuzzCups. 6.1 Personnel Plan As the personnel plan shows, JJB expects to make significant investments in sales, sales support, and product development personnel. Personnel Plan Managers $100,000 $105,000 $110,250 Pastry Bakers $40,800 $42,840 $44,982 Baristas $120,000 $126,000 $132,300 Other $0 $0 $0 Total People Total Payroll $260,800 $273,840 $287,532 Financial Plan JJB expects to raise $110,000 of its own capital, and to borrow $100,000 guaranteed by the SBA as a ten-year loan. This provides the bulk of the current financing required. Page 98 of Innovation and Business Industry Skills Council Ltd

105 Student Workbook Appendices 7.1 Break-even Analysis JJB s Break-even Analysis is based on the average of the first-year figures for total sales by units, and by operating expenses. These are presented as per-unit revenue, per-unit cost, and fixed costs. These conservative assumptions make for a more accurate estimate of real risk. JJB should break even by the fourth month of its operation as it steadily increases its sales. Break-even Analysis Monthly Units Break-even 17,255 Monthly Revenue Break-even $38,336 Assumptions: Average Per-Unit Revenue $2.22 Average Per-Unit Variable Cost $0.35 Estimated Monthly Fixed Cost $32, Projected Profit and Loss As the Profit and Loss table shows, JJB expects to continue its steady growth in profitability over the next three years of operations. Pro Forma Profit and Loss Sales $491,000 $567,105 $655,006 Direct Cost of Sales $76,750 $88,646 $102,386 Other $0 $0 $0 Total Cost of Sales $76,750 $88,646 $102, Innovation and Business Industry Skills Council Ltd Page 99 of 128

106 Appendices Gross Margin $414,250 $478,459 $552,620 Gross Margin % 84.37% 84.37% 84.37% Expenses Payroll $260,800 $273,840 $287,532 Sales and Marketing and Other Expenses $27,000 $35,200 $71,460 Depreciation $60,000 $69,000 $79,350 Utilities $1,200 $1,260 $1,323 Payroll Taxes $39,120 $41,076 $43,130 Other $0 $0 $0 Total Operating Expenses $388,120 $420,376 $482,795 Profit Before Interest and Taxes $26,130 $58,083 $69,825 EBITDA $86,130 $127,083 $149,175 Interest Expense $10,000 $9,500 $8,250 Taxes Incurred $3,111 $12,146 $15,650 Net Profit $13,019 $36,437 $45,925 Net Profit/Sales 2.65% 6.43% 7.01% 7.3 Projected Cash Flow The cash flow projection shows that provisions for ongoing expenses are adequate to meet JJB s needs as the business generates cash flow sufficient to support operations. Page 100 of Innovation and Business Industry Skills Council Ltd

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